The Budget Has Missed An Opportunity

Professor Prem Sikka, Lord Sikka writes:

After 14 years of Conservative rule with never-ending austerity, record queues at hospitals, crumbling infrastructure and the biggest fall in living standards since the 1950s, re-steering the UK economy was never going to be an easy task for the new Labour government. Labour made the task much harder for itself, with pre-election commitments which included no rise in the rates of income and corporation tax and national insurance rates for employees. It also promised to reduce pubic debt over the lifetime of this parliament.

A key test is whether the budget will deliver the government’s prized goal of sustainable economic growth. This can’t be achieved without investment in infrastructure and new industries, and without redistribution of income and wealth to increase the purchasing power of the masses. The budget delivers little on this front.

The centrepiece of the budget is a £40bn increase in taxes. This includes increase in employer National Insurance contributions (NICs), expected to generate £24.5bn a year from 2025-26 onwards. The Office Budget Responsibility feels that this will be passed on to customers and will deflate wage growth. Public sector budgets will also be depleted by higher NICs and leave less for frontline services.

The government has reconfigured its fiscal rules and will borrow £100bn over the next five years to stimulate capital spending. There is a cash injection of £22.6bn for the day-to-day running of the NHS in England, and another £3.1bn for capital spending. £6.7bn is provided for capital spending on schools. The government is hoping that the National Wealth Fund will catalyse £70bn of private investment. Essentially, the government has revived the Private Finance Initiative (PFI) under which it previously repaid £6 for every £1 of private sector investment in infrastructure. This guarantees corporate profits, and constrains future budgets. However, this is unlikely to supercharge the economy.

The budget could have provided a better business environment but does not. A large proportion of UK businesses remain uncompetitive because of political dogma. For example, high energy and water costs have destroyed the UK steel, shipping and other industries. Typically, UK industry faces energy costs which are nearly twice as much as those of its European competitors because much of their energy infrastructure is in public ownership and/or the government limits price rises. The UK government is unwilling to embrace public ownership of essential industries or impose price controls to eliminate profiteering and will therefore diminish the capacity to rejuvenate the economy.

Alongside the positive commitment of higher capital spending is the spectre of cuts. The Chancellor has set “a 2% productivity, efficiency and savings target for all departments to meet next year…”. This means real cuts in public staffing and wages. The government is going to particularly target benefit recipients and is likely to use a variety of carrot and stick policies to force economically inactive to work. Such a task is hard because 2.8m people are chronically ill and unable to work and 6.33m people are waiting for 7.64m hospital appointments in England alone. Some friction is inevitable.

The departmental cuts also handicap HMRC. The government hopes to raise £6.5bn by clamping down on tax avoidance. The Chancellor said “we will invest to modernise HMRC’s systems using the very best technology… and recruit additional HMRC compliance and debt staff”. HMRC’s budget for 2023-24 was £6.7bn, declined to £5.9bn in 2024-25, and is expected to rise to £6.7bn in 2025-26 i.e. back to the 2023-24 level. Just how many more expert staff, computers or technological support will HMRC secure with the 4.5% increase, or no real increase since 2023-24? HMRC admits that since 2010 it has failed to collect over £500bn of taxes though others put it is closer to around £1,400bn. This does not include taxes lost due to profit shifting by large corporations. Some £570bn is stashed away in tax havens by UK residents and HMRC has made no estimate of the taxes consequently lost. It is hard to see how the under resourced HMRC is going to make a significant dent in organised tax abuse.

A welcome part of the budget is that it offers some help to the less well-off, but it isn’t as great as it appears. From April 2025 the headline rate for the national minimum wage is to rise from £11.44 to £12.21an hour. This means that someone working for 37.5 hours will earn £23,874 a year, up from £22,368 a year. Most social security benefits will rise by 1.7% from April 2025. However, there is no reversal of the two-child benefit cap which deprives families of around £3,455 a year, and winter fuel payment cut which deprives thousands of pensioners of £100-£300 help with fuel bills.

By the time the increases are received their value would be eroded by inflation in the interim period. Households are facing higher energy costs averaging around £149 a year. Rise in food, housing and other costs would dissipate gains. Train fares are rising by 4.6% from January 2025. Next April, council tax is expected to rise by around 5% or £100 for most people.

Due to ‘fiscal drag’, the real tax burden will increase. The government will abide by the Conservative freeze on income tax thresholds until 2028-29. The freeze on tax-free personal allowance was first introduced in March 2021 and will continue to 2028-29. More people are forced to pay income tax. In 2021-22, some 31m people paid income tax. By 2028-29, that number is expected to surpass 40m. Due to the freeze, extra £48bn of income tax would be paid. The net effect of the budget is that the average person’s disposable income will decline by £300 a year, and stunt economic growth.

There is considerable potential for redistribution of income and wealth and using the proceeds to lift people at the bottom out of poverty, but the government has shunned wealth taxes and financial transactions tax. There is no real reform of inheritance tax. In general, the headline rate is 40% to estates worth over £325,000. But a quarter of estates above £10m pay less than 9% and one in six pay less than 4%.

Some promised tax measures have been stymied. In June 2024, in relation to ‘carried interest’ of private equity managers Chancellor Rachel Reeves said “I don’t think it is right that . . . what is essentially a bonus is taxed at a lower rate than employment income, when you’re not putting your own capital at risk …If you are putting your own capital at risk it is appropriate that you pay capital gains tax.” When asked whether she expected most carried interest in the UK to be taxed as income under this broad approach, she said “Yes”. However, the government will now tax their income running into millions of Pounds at 32%, compared to the highest marginal income tax rate of 45% for wages. Private equity managers won’t pay any national insurance. Carried interest is taxed at 34% in France and 34.7% in New York.

The government has increased the lower rate of capital gains tax from 10% to 18%, the upper rate from 20% to 24%, and made other adjustments. This is expected to deliver £2.5bn a year by 2029-30. The possibilities of raising greater sums by alignment with income tax have been shunned. Wages are typically taxed at marginal rates of 20%-45%, but capital gains will be taxed at lower rates and recipients will not pay any national insurance. Dividends will also be taxed at lower rates than wages and not be subjected to national insurance contributions.

The budget has missed an opportunity to create a fairer tax system, reduce inequalities and boost people’s purchasing power. This will be translated into low economic growth rates. The projected economic growth rate is anaemic; 2% for 2025, falling to 1.6% by 2029. So, the prized goal of sustained economic growth is not in sight. In mitigation, it may be argued that this is the first Labour budget for 14 years and can’t undo the damage done by the Tories and further budgetary changes will come in future years. However, do to so, the government will need to abandon Tory economic policies, redistribute income and wealth, eradicate poverty, strengthen worker rights, and take essential services in public ownership.