John Redwood is a former Secretary of State for Wales and MP for Wokingham. He writes regularly at his diary.
Here we go again. 47 more days until the budget. 47 more days for stories to run about higher and new taxes. 47 more days for the left-inclining think tanks to identify more sources of above-average wealth and income that they think should be confiscated by state taxation. 47 more days for the media to generate stories that persuade more people and companies to avoid spending in case they will face a higher tax bill. 47 more days to tempt more well-off people to leave the country altogether, to cancel more business investment projects and delay creating more jobs.
This was what happened before the two Reeves budgets. Long run-up periods led to much unhelpful speculation about increased taxes leading to the exodus of millionaires, billionaires and talented people. Coupled with substantial tax rises in the final packages, this drove down new jobs and vacancies, forced up unemployment, slowed growth and undermined the housing market. When asked about this possibility again, the Government says they have shortened the time to the budget to limit the damage. Two months, now 47 days, is still a long time.
The trouble is, the two Reeves budgets did put up taxes by a stated £40bn and £26bn, so people are right to have fears of more to come. If the Government was seriously worried about growth and jobs they would learn from the experience of the last two years and would rule out any tax rises in Budget 3. They say you cannot rule out tax rises in advance of the budget, yet their Manifesto ruled out all rises in the big three taxes for the whole Parliament. Labour could only win the election by promising not to impose more taxes on working people. They have already distorted the promise by the hike in employer National Insurance Contributions. These do of course hit the self-employed and have served to destroy jobs, which does affect working people. The failure to calm fears of higher taxes implies higher taxes are still on the agenda.
The last budget of the Conservative government in March 2024 proposed spending £1,226bn in 2024-5, rising to £1,323bn by 2027-8, an increase of £97bn or 8 per cent. In last November’s plans the Government proposed to spend £1,468bn in 2027-8, an increase of 11 per cent over the Conservatives and 20 per cent higher than Conservative plans for 2024-5. £145bn of extra spending next year has proved difficult to finance, with the extra taxes falling well short of the extra spending. As a result, the Conservative forecast of borrowing just £50bn in 2027-8 has risen to £147bn under the Government.
The Government, in its end-2025 budget, set out plans to borrow almost £100bn more, to tax £66bn more and to spend £145bn more. Lower growth and fewer jobs so far help account for the need to increase borrowing and taxes by more than spending, to allow for lower-than-expected tax revenues to pay for everything. Mr Burnham should study these poor figures and poor results. With John Healey, he should try to do something different this time round. Instead, it looks as if they think they need to spend yet more money than Starmer/Reeves and offset some of the costs with yet higher taxes owing to the difficulties of borrowing more at realistic interest rates.
The Government was given a higher growth rate in the OBR forecasts for saying they would get some extra growth from their attempts to reform planning. So far there is little sign of this having a positive effect, with housebuilding way below required levels. Large projects still take a long time to get approval. Permissions to go ahead with new oil and gas have remained stymied by political hostility. They were also given a higher growth forecast for their increased public-sector investment. The more they spend this money on things like the heavily loss-making British Steel, the computer remediation costs at the Post Office and the endless delays and overruns of budget at HS2, the less they are likely to create extra growth from more nationalisation and public capital spending.
The markets have decided to charge the Government a high premium in extra interest costs to borrow because many bond investors and traders think the Government is spending and borrowing too much. The Government needs to borrow around twice the £147bn of new borrowing in 2027-8 in order to replace debt that needs repaying as well. The debt issuance is scheduled to be £275bn this year and £308bn next, leaving bond investors plenty of opportunity to acquire UK debt and plenty of bargaining power over how much interest they want in return. This creates the doom loop, with interest charges shooting up. These add to total public spending, which in turn requires yet more borrowing. The UK state has to borrow to pay the interest on the debts.
So what should the budget contain? It should contain no new tax rises. It should reduce tax rates where it can collect more revenue by setting a lower rate. The taxes on wealth and transactions are now such that many people either leave the country or take legal routes to avoid the charges, lowering the receipts. It should deliver a package of tax cuts and subsidies that help many more people into jobs and allow businesses to create the extra jobs that are needed. This needs to be paid for by offering far fewer sick notes for life, with benefit reform to incentivise work and lower the overall bill.
The stark omission from the Government’s pre-budget planning, and from most of the debate in the establishment media and left-facing think tanks, is a proper debate about where savings can be made in the bloated public-sector budgets. Why send Mauritius large sums with the gift of islands which are British and should stay so? Why put so much public money into carbon capture and storage projects? Why grant so many long-term benefit entitlements to people who would be better off working? Why allow the continuing cost overruns at HS2 whilst paying large salaries and even bonuses to the senior managers who have wandered so far off the original budgets and management plan? Where is the business plan to cut the £500m-a-year losses at the Post Office before grants, and the £500m losses at British Steel? Where is the plan to slim the civil service and return public-sector productivity at least to the higher levels of 2019?
The Government cannot succeed with this budget without substantial reductions in current costs. The OBR forecast, which determines the fiscal rules, is likely to show a worse position than last year. Inflation is up, productivity disappointing and interest charges high. All this means less revenue and more cost. To get closer to the fiscal rules, the Government needs to narrow the gap between current spending and income. It needs to take more measures to promote growth. The OBR might need to revise down the credits it gave for planning reform and public investment in the light of how they are working out. It will need to reflect the market penalties on borrowing more in its outlook.
The Government will, in turn, need to break out of its doom loop. With interest rates well above the one-day worst Truss level, borrowing more is not a sensible option. Borrowing £300bn a year at these levels for new debt and rolling over old debt is crippling the finances. With the last two sets of tax rises so visibly hitting jobs, investment and growth, more tax rises offer no hope. The 1970s Labour government tried to outrun markets with more spending and borrowing and high taxes. It ended in tears, borrowing from the IMF, which forced it to cut spending. This Government needs to restrain the hands that want to sign the cheques for more public-sector costs before some external force comes in to do it to them.
Meanwhile, the ticking time bomb under the budget is the Chancellor's former promise to boost defence spending by more than the Government agreed. He still has to find the cuts in the MOD budget promised as part of the package to edge the total up to the 2.7 per cent of GDP he thought was too little. It looks as if Mr Burnham expects him to eat his former words on the timetable for more defence spend. It could be a gripping story as the battle for better defence becomes a serial drama.