This is the last continuity Budget that government can get away with
4 min read
John Healey paid tribute to Rachel Reeves at the start of his Budget speech, and the former chancellor’s fiscal plans cast a long shadow over his plans.
The 2024 and 2025 budgets set out a path for the public finances in this Parliament of rising taxes, a front-loaded increase in public spending, and falling borrowing. Healey’s Budget did little to change that overall picture.
This may be unsurprising for a Prime Minister and Chancellor who have only been in their roles since late July, but it is likely to be the last time this government can avoid the tensions that are building within that plan.
Some of those tensions are driven by events outside the government’s control.
The conflict in Iran is causing deep and ongoing damage to household and government finances, and Healey needed to deliver a support package for households. The Chancellor was right to try to keep the overall size of support small and time-limited, but the risk is that relatively broad and relatively shallow support won’t be sufficient if the conflict continues or its economic impacts worsen.
But some problems are of the government’s own making.
while Healey highlighted that tough choices are coming, this Budget did little to show that the government is gearing up to make them
The commitment to raising defence spending has been clear for some time – indeed, Healey was the main proponent in his previous role. But set alongside already tight spending figures, and higher inflation which erodes the value of those cash figures in real terms, the spending totals for future years have long looked hard to square with the government’s ambitions.
Next year’s Spending Review looks very tricky indeed. Healey highlighted that tough choices are coming. As has the Chief Secretary to the Treasury, who told PoliticsHome that "difficult decisions" await. However, the Budget did little to show that the government is gearing up to make them.
That is before any new spending priorities emerge. What additional spending on employment support for young people will the Milburn review recommend? Does the government’s vision for ‘public control’ involve more public spending too? Does the government want to increase funding for some elements of social care as a down payment on its promised social care reforms?
One argument for delaying the Spending Review is that the government is taking the time to define some of this agenda through the upcoming ten-year plan. The fiscal devolution roadmap is an early sign that devolution plans will be genuinely ambitious. But continuing delays have a cost too: departments will need to know what money they have to spend to fully orient themselves to deliver the government’s reform plans.
On the other side of the ledger, the tax system is still in dire need of reform. Rather than set out an agenda for reform, the Chancellor fiddled and complicated further in his mission to find ways of raising revenue without breaking any Labour pledges while also staving off problems. The biggest stories on tax were decisions not taken, such as the decision to rule out increases to capital gains tax in advance of the budget.
The UK government has been happy to receive plaudits internationally for its plans to reduce borrowing in the coming years. This is a sensible approach in the current economic environment, but one that depends on the government delivering its tax and spending plans over the coming years. History tells us that it is easier to make borrowing fall in a forecast than in reality.
This Budget did not address many of the difficult questions the government faces, but it did bring them into sharper relief.
In the coming year, the government will need to make decisions on everything from defence spending, public services, the welfare system, migration and taxation. These are likely to have much greater implications for the public finances than this Budget, and come with many more difficult trade-offs.
This was a continuity budget, shaped in large part by the decisions of the last chancellor. Next year, will not be able to repeat this approach.
Dan Haile is a senior economist at the Institute for Government
