Survival - for now

Five big risks hidden in the budget

Back at the start of October I said this budget would be a choice between staying alive and taking control. Rachel Reeves and Keir Starmer could break their election pledge, raise income tax rates, engage in serious reform and give themselves the ability to solve a bunch of long-term problems. Or they could raise some less politically sensitive taxes and meet the fiscal rules without taking too many risks.

I thought the second option was more likely:

“The temptation will be to avoid political risk as much as possible. That’s been the story of the last decade as a series of unpopular governments have struggled to survive. It’s easy to imagine ministers justifying it to themselves on the basis that they just have to get through this year.”

Though there was much speculation about the prospect of higher income tax rates – mostly fuelled by government briefing and strong hints from Reeves – I don’t think it was ever going to happen (there was a rise in rates on savings, dividends and property but not earned income). It may even have been an attempt to manufacture a positive surprise for the day, which was then lost when the decision not to break the pledge was leaked to the FT.

The decision to go for the “staying alive” option was made easier by a relatively kind OBR forecast, with a downgrade at the lower end of the range of possibilities. Increases in the future tax take, thanks largely to higher than expected inflation, partially offset downgrades to productivity assumptions, higher welfare spending, and larger debt repayments. Taxes will still go up by a chunky £26 billion. But most of this won’t hit for a few more years and will come via fiscal creep or fairly targeted raids on groups that aren’t hugely popular.

As such it will work for survival purposes. There’s not going to be a Truss-style market panic or a (further) collapse in poll ratings. Most Labour MPs will be happy to see end of the two-child limit, which will lift 450k children out of poverty (and those Labour MPs worrying about the politics should ask why they bothered running for office in the first place if it wasn’t to do things like this.) Barring unexpected scandals or disasters Starmer and Reeves should now be safe until the May local elections, giving themselves time to shore up support.

But the cost of choosing this option is that, once again, the truly difficult decisions have been put off for later and little has been done to deal with the big problems facing the country. The OBR forecast is full of longer term risks deferred or exacerbated. So in the rest of the post I’m going to look at five of the biggest issues that could come back to bite the government (as well as a few potential upsides).