Labour’s first Budget is a real monster – but it could have been much worse

Thankfully Rachel Reeves pulled some of her punches during the £40bn tax grab

The three largest numbers in this Budget were the National Insurance increased costs on business, additional spending on the NHS and other public services, and increased borrowing.
The first Budget following a change in the colour of the government is always radical – as the newcomer sets out their agenda. But this one is a real monster.
Despite the Chancellor declaring that her number one mission is growth, most of the measures are likely to hold this back, and that is duly reflected in the Office for Budget Responsibility (OBR) forecasts.
There is clearly a case for additional investment in public services, especially the NHS, but it is the private sector on which we largely rely to grow the economy – and hitting businesses with extra costs is counterproductive to that growth. Higher borrowing is also expected to have an indirect cost on the economy, as well as individuals, because it is likely to put pressure on inflation and interest rates.
Having said that, it could have been much worse for many of us. There were no restrictions on pension contributions as was feared, nor on Isas.
In addition, the increases in capital gains tax rates were relatively modest. It was always likely that defined contribution pension funds would be brought into the estate of members for inheritance tax – although there does not seem to be an equivalent downside for those with final salary pensions, now largely enjoyed by the public sector.
The increase in the stamp duty surcharge on second properties from 3pc to 5pc may prove to be the final nail in the coffin of the buy-to-let market. I recognise that many readers will approve of this as a way of making more properties available to buy, but it is of no help to those looking to rent – as the supply of rental properties reduces and rents rise.
I expected the deep freeze on the income tax personal allowance to be extended and the £175,000 inheritance tax residential nil rate band introduced by George Osborne to be abolished, so perhaps we should feel grateful that this didn’t happen.
Nevertheless, inheritance tax remains a very unpopular tax which will hit progressively more estates if, as hoped, the economy grows.
The changes to inheritance tax business and agricultural property relief are a real concern and raise relatively small amounts of additional revenue, but could have a disproportionate impact on these important sectors of the economy.
Likewise, the reduction in the lifetime limit for capital gains tax relief for investors in unquoted companies from £10 to £1m effectively removes an important incentive for investors in growing businesses. And yet the official documents show the additional tax raised as “negligible”.
None of this can help to promote growth, quite the reverse.
The Chancellor has decided to soften the blow to smaller businesses of the employers National Insurance increase by raising the Employment Allowance from £5,000 to £10,500.
This was introduced by Mr Osborne in 2014. I remember it well because Treasury Minister David Gauke called me a couple of days before the announcement to ask what I thought the reaction would be. It was the one and only time I was entrusted with a Budget secret.
There is nothing fundamentally wrong with tax-raising budgets. Sometimes they are necessary to stabilise the economy. I remember clearly the famous 1981 “hair shirt” budget of Geoffrey Howe.
Margaret Thatcher became prime minister following the 1979 election at a time when the Labour government had allowed both inflation and national debt to rise strongly.
Mr Howe announced tax rises of £4bn, equivalent to about £22bn today, in the face of enormous criticism from Labour and Conservative MPs alike. A letter was even published and signed by 364 economists stating that there was no basis in economic theory or supporting evidence for the policy that the Budget was seeking to implement, and that it threatened Britain’s social and political stability.
In a heated debate in parliament, Mrs Thatcher was asked to name two economists who supported her approach. She replied Patrick Minford and Alan Walters. When she returned to Downing Street a civil servant apparently commented that it was “a good job” that she was not asked to name three. Although I suspect that Terry Burns and Tim Congdon would also have agreed.
The policy worked and an economic recovery began soon after the letter appeared. Much more work was required on labour market and trade union reforms but investors returned and the economy recovered, which paved the way for Nigel Lawson to announce significant tax cuts in his 1988 budget.
Equally, there is no particular economic issue raised through investment in the public sector as long as the money is efficiently deployed.
Former chancellor Philip Hammond once told me that he would invest more in the public sector if he could see productivity raised towards that achieved in the private sector.
The problem with this Budget is that the additional taxes being raised from business are not being used to reduce borrowing but to invest in public services which have not yet demonstrated these productivity improvements.