Rachel Reeves might not be popular - but her Budget did its job: Max Shepherd
When Rachel Reeves presented her highly anticipated second Budget a few weeks ago, the pressure was on.
She needed to balance the needs and wants of the electorate, the Labour Party and the financial markets – an almost impossible task given the state of the public finances.
The Chancellor raised taxes by £26bn, historically a large increase. There have been three similar increases in the 21st century: in 2010 following the global financial crisis, in 2021 after Covid-19 and the previous budget.
The Budget has not been popular. According to YouGov, 48 per cent think the Budget unfair while 21 per cent felt it was fair - the second-worst rating since polling began in 2010.
However, I suspect it would have been even less liked if the Government changed income tax rates, as was being considered.
Reeves had warned it would be a difficult budget. Three weeks before, she said “each of us must do our bit”, suggesting widespread tax hikes were likely. After a difficult budget last year, it is understandable the public are frustrated that things aren’t improving.
Tax measures included a further freeze on income tax thresholds from 2028-2029; a 2 per cent increase in the income tax rate on dividends, savings and rental income; a reduction in the cash ISA limit from £20k a year to £12k a year, for the under 65s; and a high value property surcharge, increasing council tax on properties valued over £2m.
The financial markets reacted quite positively to the Budget, for two main reasons: the increase in headroom and the reduction in forecasted borrowing. In the hours after the budget, the implied cost of government borrowing fell, with bond yields falling more than any other budget day since 2006. Interest rate expectations were broadly unchanged.
In recent years, both Labour and Conservative chancellors have been leaving themselves very little headroom, so if economic data or government spending deviates from the plan in any way, speculation begins on how the government will address the ‘fiscal hole’ in their next budget.
This period of speculation generates considerable uncertainty for businesses and consumers and has been particularly toxic in the run up to this year’s budget. This is due to the small headroom Reeves left herself last time, and the red lines set out in Labour’s 2024 manifesto. For months, the media speculated about how much the government would need to raise in taxes, and the levers they would pull to stick to the fiscal rules.
Despite its unpopularity, I think the Budget served its purpose. Given the state of the public finances, fiscal consolidation was needed, and more than doubling the headroom will reduce uncertainty to an extent ahead of future fiscal events (if data moves broadly as expected).
The policies announced aren’t seen to be inflationary, which supports the ambition to get inflation back towards the 2 per cent target, easing future cost of living pressures. This should support the argument for the Bank of England to reduce base rate again, lowering borrowing costs for consumers, businesses and the government.
Market stability is fundamental for rebuilding business confidence and growth, and the Budget managed to deliver that, despite the fears and speculation on the run up. Whilst this might not have been the most glamorous or generous budget, in the context of our fiscal position, a budget resulting in market stability can be considered a small victory.
Max Shepherd is Group Economist at Yorkshire Building Society