Uk: The ‘make Or Break’ Budget

The UK had an apparently important financial event today.  The Labour government’s finance minister (called the Chancellor of the Exchequer, a feudal royal term), Rachel Reeves presented the government’ s tax and spending measures for the year (and years ahead).

It was billed as a ‘make or break’ budget for the Labour government which is languishing badly in the opinion polls – its share of support has halved from an already low election result of 34% in July 2024 when Labour won a landslide of seats.  The anti-immigration, pro-Brexit Reform party is now polling near 35%, with the Conservative party also down in the teens. 

The Labour government’s 18 months in office has been nothing short of disastrous.   First, it launched a series of vicious cuts in welfare spending: dropping the annual winter fuel for pensioners just at a tme when energy prices reached an all-time high.  Then it announced cuts in benefits for disabled people.  And just so another section of vulnerble Britons were not missed, it announced the maintenance of the ‘cap’ on child benefits to families with no more than two children.  This meant that any family with more than two kids was badly hit.  There are already 4.3m children officially in poverty in the UK and the cap would drive that poverty level to new heights.

PM Starmer and Reeves were wedded to idea that the government had to fill a ‘fiscal black hole’, namely running an annual deficit of spending over revenue that would drive up the public sector debt, already 100% of GDP. 

To stop that rising, the ‘black hole’ had to be filled with tax rises and spending cuts, so that holders of government bonds (banks, pension funds, insurance companies, foreign investors etc) would not sell bonds and/or demand higher interest to buy them.  The last time a government that intended to raise spending and finance it by ‘printing’ money (by the Bank of England) was the ill-fated and very short reign of Conservative PM Liz Truss.  The bond market sold off and the pound slumped.  Truss and her Chancellor were ousted by their own party within days.

On gaining office, Reeves and Starmer assured the ‘bond vigilantes’ (as the City of London is often called) that Labour would not be spendthrift  but instead would close the ‘fiscal gap’ and keep public debt under control.  And they did what would appeal to the vigilantes the most: austerity for the poor and subsidies and deregulation for the rich. This was a political disaster and under pressure from their own MPs, the Labour leaders have rowed back on all those cuts. This November budget finished that 180 degree turn by announcing the end of child benefit cap.

However, the problem remained that the government still thought it needed to meet the bond market’s demands.  How to fill the ‘fiscal hole’?  The trouble is that this hole is imaginary – it’s in the minds of the government and the financial sector; and it varies in size depending on how fast the British economy is growing.  The faster it grows, the more tax revenues rise and spending falls on welfare and unemployment benefits.; and so the hole gets smaller.  But here’s the rub.  The UK economy is stagnating, more or less, in real terms, the only growth is in nominal GDP, in other words, in price inflation. The UK has the highest inflation rate among the top G7 economies.  As a result, money lenders have kept their interest rates high in order to maintain their real gains and so small companies and household mortgage holders are suffering badly. 

The body that oversees the credibility of government tax and spending measures, the Office for Budget Responsibility (OBR), has finally recognised that the UK economy is crawling along.  Having previously optimistically forecast economic growth that was never achieved, the OBR has now reduced its forecast for real GDP growth from 1.8% a year to 1.5%.  If those new forecasts were right, it would mean that government would not get enough tax revenues to match spending.

But it was not true that welfare spending was ‘out of control’. Welfare spending has held roughly steady as a share of the economy since 2007. Total welfare spending in Britain in 2025-26 is estimated to be 10.8 per cent of GDP. That’s just 0.8 per cent of GDP higher than in 2007-08, and spending has actually fallen fallen by 1.2 per cent of GDP since 2012-13. Nevertheless, big business and the financial sector demand welfare cuts and oppose tax rises – at least for the rich.

So what has Reeves done?  In order to ‘fill the fiscal hole’ to keep government debt from rising, she has not raised taxes on the rich; she has not raised the tax rate for the richest earners; she has not introduced a wealth tax on the super-rich.  Instead, she has raised a ‘stealth tax’ on average earners which she admits will “hurt working people. I won’t pretend otherwise.”  So the tax burden as a share of national GDP will reach an all-time high by the end of the Labour government’s term of office in 2029 (if it lasts that long). 

In order to cover the cost of the reversal of its previous welfare cuts, Reeves has also raised taxes on gambling; introduced a mansion tax on very expensive properties (ie valued at over £2m) and increased taxes on dividends and capital gains.  But the Resolution Foundation thinktank reckons that, even with the “mansion tax”, someone with a £5m home in central London will still pay less local tax as a proportion of the value of their home than someone with an average home in far north Sunderland.  Moreover, most of these increased taxes on richer Britons are not starting until near the end of this parliament, while the hit to average households will be from April next year.

And the likelihood of meeting even the government’s fiscal targets are low.  As the OBR says: “the economic outlook depends on uncertain judgements on the paths for productivity, inactivity, and net migration. The fiscal forecast also remains highly sensitive to movements in interest rates and inflation given the level of debt.”  The OBR puts fiscal success at just 59%.

This is no ‘make or break’ budget, except perhaps for the Starmer-Reeves government in meeting the demands of the City of London.  For most Britons, the British economy is already broken.

Let me remind you.  Britain has the highest inflation in the G7; the highest electricity prices in the OECD; rising unemployment hitting 5%, stagnating real incomes since 2019; rising inequality and poverty (with 3m-plus living off ‘food banks’); the widest regional disparities in Europe; the lowest benefits relative to average wages in the OECD; public services in tatters; NHS waiting lists at a record high; local governments going bankrupt; care workers exploited by private companies and the government; more ‘social housing’ being sold to private landlord companies than are being built; water and energy companies making huge profits, while sewage pours into rivers and the beaches; and the prison and justice system paralysed.

None of this Humpty Dumpty British economy will be put together again by tinkering with a few tax measures in order to fill an imaginary fiscal hole. Speaking to Labour MPs before the budget, Reeves said that “We know there is more to do. That’s why we are investing £120bn more than the previous government in national infrastructure, cutting red tape and unnecessary regulation for businesses, introducing a new planning bill and securing new trade deals across the globe.” But this £120bn is not public investment; the government is only spending just £7bn in public funding of projects; the rest is supposed to come from the private sector through the much discredited public-private partnerships that land hospitals, schools, and other projects in permanent debt to private equity companies. Even that figure is way too small – an LSE research study reckoned that up to £60bn a year was needed to repair the economy and its people.

The government is not increasing the funding of local councils in real terms. It is not meeting the urgent needs of the National Health Service, the schools and universities.  It is not going to build anywhere near enough ‘affordable housing’ because there is no public building programme, just measures of deregulation of planning and environmental controls over private developers.  On the other hand, ‘defence’ spending is set to rise dramatically over this parliament in order to protect the nation from Russian invasion.

Make or break?  Broken now and not being remade.