Reeves’ Budget appears to have reassured backbenchers and markets – for now

The Budget has landed well with Labour MPs and the bond market, but voters might be a bigger issue to contend with given time, Paul Montague Smith, senior counsel – public affairs at MRM writes.

It must be the most embarrassing start to a Budget speech in history. After months of economically damaging briefings, speculation, rolling the pitch and U-turns, the final chaotic cherry on the cake was the mistaken release of the Office for Budget Responsibility’s (OBR) report some 90 minutes before it should have been, revealing all the Budget measures before the Chancellor announced them on the floor of the Commons.

To her credit, the Chancellor handled it well and delivered her statement with force and resilience. Her Budget appeared to land reasonably well with her backbenchers. After initial wobbles when the OBR report was released, the markets also settled and were benign.

No, there was no broad-based wealth tax as many Labour party members would have liked, but it was essentially a Labour tax and spend Budget with measures to help those on lower incomes. The lifting of the two-child benefit cap – a particularly totemic measure for Labour members – was delivered as trailed, to much delight from the benches behind her. Polling suggests that the general public, however, will be far less enthusiastic.

In macro terms the Budget means spending and tax are going up, with borrowing also initially up but then coming down. It turned out that the black hole needing to be plugged was much smaller than expected.

While the OBR had significantly downgraded productivity to the tune of some £16bn a year, there was a big boost in forecast revenue by the same amount, helped by higher-than-expected inflation. So, the fiscal repair job of some £6bn (driven by higher pressure on spending) was much less than feared. This is all before the cost of policy U-turns and new measures announced by the Chancellor.

On spending, the forecast for spending on welfare was revised upwards by £16bn a year, £9bn of which was down to those U-turns on winter fuel payments and benefit reforms. Departmental spending plans have been pared back for later in the parliament, with day-to-day spending rising by 0.5% rather than 1% as previously planned. The Chancellor has, as she signalled, protected the £120 billion increase in public investment that she announced last year.

On tax this is already set to be the largest tax raising parliament since at least the 1970s. Rachel Reeves’ plans mean a £26 billion tax increase, taking the overall tax burden to an all-time high of 38 per cent of GDP.

The freeze on income tax thresholds is expected to raise £13 billion of that, but the figure could be much higher or lower depending on what happens to inflation. By 2030-31, 5.2 million more people will be paying income tax, with 4.8 million more moving into the higher rate band.

The other larger tax contributors are the salary sacrifice cap, the increases to Capital Gains Tax (CGT) and dividend income rates, a reduction in companies’ main writing-down allowance and the new Electric Vehicle Excise Duty. One other chunky contributor, raising £6 billion in 2026-27 but then reducing to several hundred million a year, comes from a three-year freeze in the threshold at which students on Plan 2 Student loans start to make repayments.

What is notable is that more than half of the increased tax take will hit in 2029-30 alone. The rises are heavily geared towards the end of the parliament, which could prove challenging for Labour in terms of the electoral cycle. However, the measures also sensibly double the Chancellor’s headroom to £22 billion which will hopefully lead to less instability in the management of the public finances.

Overall, the impact of the Budget is skewed towards people with higher incomes or wealth. The distributional analysis suggests that only the top 10% of households will be worse off in a few years’ time as a result of Labour’s choices since the election, once ‘benefits in kind from public services’ are taken into account.

The depressing news is that average disposable incomes are expected to only grow 0.5% in real terms this parliament, compared with an average of 2% in every parliament from the mid-1980s to mid-2000s. While the growth forecast for this year was increased from 1% to 1.5%, anticipated future growth is now marginally slower than previously expected due to lower underlying productivity growth.

As with previous budgets, the Government is relying heavily on being able to find more efficiency savings (of £6 billion a year by 2030-31) and cracking down on tax avoidance to hopefully raise an extra £2.4 billion a year over and above existing £7.6 billion a year target.

There is then, yet again, a significant amount of uncertainty about whether this Budget will survive contact with economic, political and practical reality.

What it clearly wasn’t was a budget for growth. From growth being Labour’s stated central mission, with every budget supposedly to be geared towards it achieving it, the Government’s narrative switched to being about cutting living costs, NHS waiting lists and debt.

In the financial services space, the changes to salary sacrifice will very likely lead to a restructuring or shift in behaviours by firms and individuals and may therefore not raise the money the Chancellor hopes for, while possibly lowering overall pension contributions. But with salary sacrifice into pension schemes forecast to almost treble in cost, and with the arrangements supposedly benefitting the wealthiest while excluding those on the minimum wage, the Government felt it right to act.

As expected, a limit was introduced for the cash element of ISAs to encourage longer term and higher return investment, but savers over the age of 65 will continue to be able to save up to £20,000 in a cash ISA each year. Lifetime ISAs (LISA) are set to be replaced by a new product focused on helping first time buyers, with a consultation expected early in 2026.

Tax on savings income is to go up by 2% across all bands, justified by the Chancellor as a step towards equalising returns from ‘earned’ and ‘unearned’ income, on the basis that employees pay National Insurance. With such an ideological justification underpinning the move it’s likely further steps could be taken along this path in future Labour budgets.

For pensions and death benefits subject to inheritance tax, personal representatives will be able to direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months and pay inheritance tax due in certain circumstances. Personal representatives will also be discharged from a liability for payment of inheritance tax on pensions discovered after they have received clearance from HMRC.

All in all, it was a big budget, which as of writing has landed reasonably well with Labour MPs and the markets. Will it change the Government’s fortunes and polling?

Very unlikely, and while Labour MPs have something new to sell to people on the doorstep as a result, when voters have had their say in the local and devolved parliament elections next year, the chances are that this Budget will quickly be forgotten by swathes of MPs fearing for their seats and questions about the party’s leadership and direction will quickly re-emerge.