The verdict is in – and Labour won't like it

The world is still digesting the ramifications of Donald Trump’s astonishing journey back to the White House, but that should not stop investors from focusing their attention on post-Budget Britain's problems. Trump’s win is likely to pose difficulties for Keir Starmer, but one thing both leaders share in common is a need to deliver change for disenchanted voters fed up with the dreary lack of improvement in living standards.

Labour has promised millions more NHS appointments, cheap clean energy, 1.5mn new houses, plus strong economic growth. The party has stumbled several times since the election between freebie rows and the winter-fuel slap in the face for pensioners, but it is still early days. Yet although three months of assembly time was allocated to the government’s first Budget, it is not clear whether it fully represents the tax policies to come, or if this was more of a toe in the water exercise with fresh difficult decisions on IHT, gifting and pensions to come later. Certainly what stands out from Reeves’ first major act as chancellor are the significant tax hikes for businesses and the dark cloud over British farmers, both developments that appear to go strongly against the grain of supporting economic growth, and perplexingly, agricultural security. 

But for all the money being sucked from businesses and raised in new debt, there is a distinct air of disappointment at what will be achieved with it and uneasiness over the lack of fiscal headroom and unrealistic funding plans further out. Paul Johnson at the Institute for Fiscal Studies (IFS) pointed out that after 2025-26, day-to-day public spending rises by an implausibly tight and "miserable 1.3 per cent a year”.

The post-Budget expectation is that by the end of the decade, net debt will have fallen by only a sliver from 98 to 97 per cent of GDP, while growth rates will barely change. The Office for Budget Responsibility’s verdict is that while real growth should pick up to 2 per cent next year and to 1.8 per cent in 2026, it will fall back to a depressingly low 0.5 per cent thereafter. After five years GDP will be largely unchanged. Oxford Economics even thinks the Office for Budget Responsibility (OBR) view that the package will offer a sizeable boost to growth in the short term is too optimistic. All the while tax will continue rising to a historic high of 38.2 per cent by 2029.

The Budget did not include big statements on issues such as industrial strategy or welfare reform, and when these come, they may alter the outlook to a degree. But it did include measures that put the survival of smaller family-run businesses and farms at risk at a time when thousands of private high-growth British companies have been, and continue to be, bought out, often by foreign buyers, and we are in the grip of an IPO drought. 

My local high street has many successful family businesses nestled in between the charity shops, cafes and the usual chains. Many of them are several generations old and thriving. Their success is clearly linked to the hours they put in, their long-term thinking and expertise, the loyalty they command from customers. But it is surely also a factor of being able to pass it down with no IHT burden. If the business is now instead sold to another entrepreneur, it will almost certainly begin life burdened with bank loans, reducing its chances of success and its ability to support jobs. Indeed, the low profitability of farms is one reason why farmers are so angry. Political objectives may have seeped into the thinking here, for example a desire to break up large estates or free up land for solar energy, and Labour may suspect that wealthy individuals are abusing the rules, in which case a tightening up was all that was needed.

Overall, the verdict on the Budget is that it’s unlikely to fire growth or leave the public sector finances in better shape; it is likely to hurt private sector wages (but not public sector ones) and the survival of British farms has been put at risk.