The budget boosted spending again, taking the 2027-8 total up to £1504 bn from £1416bn this year. That’s another increase of £88bn. Borrowing was up again to £146.1 bn . The need to also borrow an additional £166.5 to roll over retiring debt takes the total bond issue nesxt year to £312.6bn. The forecast deficit for 2027-8 was stated at £98.5bn last time but this has risen to £146bn . So the government has increased spending by £88 bn next year over this and will be borrowing £47.6 bn more than the previous forecast.
Debt interest shoots up to £155 bn from £135 bn with benefits up by £30 bn and health by £15 bn. The government acknowledges that benefit spending is too high and rightly wants to get more people into work and off benefits. It however still lacks a strategy to do so and is still following policies that lead to higher unemployment and fewer job vacancies. The big increase in National Insurance, the increases in Minimum Wage and public sector wages, and a range of anti business tax measures from Business rates to the Packaging tax have helped the numbers on benefits to climb higher. The government has been sent the Milburn Report it commissioned into getting young people into employment, education and training but has not yet published it nor responded to it. They will need to adopt a range of measures to help create more jobs suitable for young people and to set out the right balance of incentives and conditions for benefits to get more into jobs. This is policy delayed.
The same is true of the unresolved issue of the Defence budget. The Chancellor resigned from the Starmer government over its refusal to spend 3% of GDP on defence by 2030 on the way to 3.5% to meet the NATO commitment by 2035. This has been put off until sometime next year as part of a wider review of Public Spending. This budget has not provided for additional tax revenue to meet the need for more spending, so the assumption must be the Chancellor expects to find spending reductions elsewhere to cover the additional money for our armed forces.
The government takes comfort from the kind words of the IMF saying the government has a plan to get the deficit under control. The problem with this is the Plan assumes much tougher spending controls in the next two years than the government has imposed over its first three years in office. Past experience tells us that governments usually give in to spending pressures when the tough year approaches. They can do so because the target moves on by one year every year, so the Year 3 target never has to be hit. It is very unlikely if this government holds an election after 4-5 years that it will enforce very tight spending limits on itself around the time of the election.
The government is also exploiting the extra flexibility or looseness over the Fiscal Rules Rachel Reeves introduced to allow it to spend more on capital account. It is directing more money to the National Wealth Fund and the British Business Bank who in turn can borrow more to finance spending, They can create assets which the government deducts from the debt figure. It wishes to provide more stimulus by backing or part financing energy and transport investments in particular. The OBR has warned the government that if it does take more control over the water industry it would then need to include that industry’s large debts and substantial capital spend as part of public spending and debt.
In order to cover the costs of modest giveaways to energy users and some small businesses, the government decided on an extra 3% tax on bank profits. The danger of this is it will reduce the amount of money commercial banks have available to lend to businesses needing capital to grow and consumers needing money to buy homes and bigger ticket items. This is a tax to slow growth and to tempt some banks to divert more business to other banking centres who keep their tax rates down.
The budget was advertised as a steady as she goes budget, a budget to try to please backbench MPs whilst not threatening the bond markets. It was instead a continuity Starmer/ Reeves budget, with taxes up, spending up and borrowing up. That recipe did not work well for them and will not work well for the new team. The OBR gave it poor marks, moving growth next year down to just 1%. That is not enough to solve the country’s financial problems.