Rachel Reeves' Budget will stifle the property market for buyers and sellers (Image: Steve Reigate)
There will be “no return to austerity”, Rachel Reeves promised us yesterday. What a fib. This is the biggest austerity Budget of the lot – austerity, that is, for the private sector if not for the public one.
Listen to Reeves and one thing becomes clear: she seems to think that the public sector is the wellspring from which all wealth flows. Only investment by the Government, she believes, can grow the economy.
The Chancellor has promised plenty of public sector investment in her maiden Budget speech. HS2 will be completed to Euston, after all. There will be improvements to Transpennine lines. Five hundred schools will be rebuilt, and several hospitals will be affected by the scandal of reinforced autoclaved aerated concrete.
Aside from, perhaps, the promise of pouring yet more money into the black hole that is HS2, these things will be welcomed. We need infrastructure to make the country function, and the public sector is often best-placed to provide that investment.
Nevertheless, the vast majority of wealth-creating investment is – and always has been in our market economy – provided by the private sector.
It is the private sector which constructs factories, builds most of our new homes, and invests in the shops, restaurants, leisure centres and other things which enrich our lives.
However, this doesn’t seem to occur to Reeves, nor to other ministers on Labour’s front bench. As Rishi Sunak said in his Budget reply yesterday, hardly a single one of them has experience in business or enterprise. They are all either career politicians or they have previously worked in quangos or government departments.
That is why Reeves has overlooked what should be obvious: taking money from the private sector by jacking up employers’ National Insurance Contributions will mean businesses have less money to invest.
Don’t be fooled by Reeves’ new slogan “invest, invest, invest”. The rise in NI contributions will take a huge bite out of companies’ incomes – to the tune of ￡25 billion a year.
Not only did she raise the rate of employers’ NI contributions but she lowered the earnings threshold at which they are payable from ￡9,100 to just ￡5,000. That latter change alone means it will cost an extra ￡600 a year to create a job. And that is before considering the extra wage bill created by raising the National Living Wage by an inflation-busting 6.7% (or 16.3% for 18 to 20 year olds).
Chancellor of the Exchequer Rachel Reeves holds the red Budget box outside 11 Downing Street (Image: Wiktor Szymanowicz/Future Publis via Getty)
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And, however much Reeves may try to protest, jacking up employer’s NI contributions is a blatant breach of Labour’s promise not to raise taxes on “working people”. The party’s manifesto stated clearly that there would be no rise in income tax, National Insurance or VAT. That Reeves feels she can get away with breaching this promise so soon after the Government was elected raises a basic question of trust. What promises will it break next?
Britain is set to become like France, which combines stiff protections for employees with a high unemployment rate. If you have a job, life may seem sweet – at first. If you are on the minimum wage you will, initially, receive a pay rise. Thanks to the provisions in Labour’s Employment Bill it will be harder for your employer to make you redundant. If you fancy going on strike, that will be easier, too.
But the inevitable cost of all this will be to act as a huge disincentive for employers to create jobs. Never has the possibility of replacing humans with AI seemed more attractive. This was supposed to be a Budget for those infamously badly-defined “working people”. But it was more a budget for AI bots.
While National Insurance was the most eye-catching measure, businesses will be affected by the rise in capital gains tax. The lower rate for CGT will rise from 10% to 18% and the upper rate from 20% to 24%. CGT isn’t just about private individuals cashing in share portfolios and the like – businesses need to continually buy and sell assets, especially if they are investing and growing.
Reeves spared sellers of second homes and investment properties from a rise in CGT, but she whacked people buying additional properties with a 2% rise in stamp duty. Anyone buying a ￡500,000 investment property will now have to stump up an extra ￡10,000 – on top of an already elevated stamp duty bill.
While frustrated home-buyers might be tempted to cheer as landlords suffer, they should think twice. Rents have already risen stiffly over the past couple of years as first the Sunak government, and now Starmer’s administration has tried to punish property investors. It is leading to far fewer rental homes available but isn’t going to help many people climb onto the property ladder.
It is the same punitive attitude the Government has adopted towards parents with children at independent schools. Applying VAT to school fees for the first time would be bad enough but to introduce it halfway through the school year is just plain nasty. It confirms that this is a Labour government far removed from the benign Blair administration – one motivated by class warfare.
Even the teaching unions begged the Government not to hit independent schools so hard. They know it will lead to fewer jobs as well as causing overcrowding in some schools as pupils are decanted into the state sector.
“Growth, growth, growth,” the Prime Minister promised us when taking office in July. It is easy to say, but a lot harder to see where growth will come from, especially after this Budget. The Office of Budgetary Responsibility certainly can’t seem to see much prospect of healthy growth in the economy. Reeves trotted out its forecasts yesterday as if promising milk and honey forever after. Yet what it was predicting was lukewarm at best, with growth stuck at 1.1% this year and stuck around the 1.5% mark for the rest of this Parliament.
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I don’t have much faith in economic forecasts, by the OBR or anyone else, but it does serve as a judgement on Reeves’ fiscal policy. It should be obvious that hitting businesses with hefty tax rises will compromise their ability to grow.
If Reeves really wanted to grow the economy the over-arching theme of her Budget would have been to shift resources from the public sector, where productivity growth has been non-existent in recent years to the private sector, which has succeeded in increasing output. Instead, she has done the opposite, pouring yet more money into underperforming public services, without demanding any improvement in working practices from the unions. Tempting though it might be to cheer the extra ￡22billion for the NHS, it will mean little in reality if it is swallowed up in pay rises, and in creating extra layers of management, as in the past.
No, this is not the end of austerity. It marks the beginning of austere times in the human resources departments of our successful companies, large and small. Reeves is obsessed with trying to divide up the national souffle in what she sees as a fairer way – while failing to notice that she has just thrown open the oven door and collapsed it.