Labour Delivers "Largest Rises in Tax Known in Modern Times"

Written by Lindsay James, investment strategist at Quilter Investors

Rachel Reeves delivered a budget today that came with the largest rises in tax known in modern times. Alongside this she claimed long-term economic growth would be created and sustained by investment as she seeks to plug the now infamous £22bn 'black hole'.

Growth has been at the forefront of Labour’s offer since the election was called, yet forecasts from the Office for Budget Responsibility highlight that while there is a small boost to growth next year, the rest of the decade sees growth slowing once more and risks becoming anaemic once again, with 2028 seeing just 1.5% growth.

Becoming the fastest growing economy in the G7 is a bold ambition and with the tax burden rising, the government is clearly hoping the private sector can bring about the economic growth that is needed.

Labour seems at pains to highlight its ability to manage the public finances in a way that dispels the myth of previous administrations.

Borrowing is supposedly to come down over the course of the parliament, at a time when the fiscal rules have been rewritten to allow more investment.

Whether this materialises remains to be seen given the economic and demographic challenges facing the UK of late.

Furthermore, borrowing is going to be far higher than was forecast in March, and thus Labour will face a difficult task to bring that debt burden down. But Labour is talking tough on balancing the books and as such it will be interesting to watch how this is offset with the need for economic growth.

Labour, however, is putting the burden of this budget right onto businesses, with a £25bn rise in employer national insurance contributions.

This is a significant lever to pull, but comes with many risks. Businesses may now scale back pay increases or hiring plans, which goes against the mission for growth. The Chancellor has tried to exempt very small businesses from this increase, but the vast majority of small and medium enterprises in the UK will be hit. Coupled with the hit on business relief, small companies may not appreciate the plans put in place by the Labour government.

What will delight the Chancellor is the financial market reaction. There were fears that stock and bond markets would not react favourably to the announcements today and the loosening of fiscal rules. But for now, gilt yields are down and there is no sign of a repeat of the mini-budget from 2022.

What now needs to be delivered is economic growth if the recovery in both the public finances and the wider economy is to take place.

Whilst re-defining fiscal rules to take account of investment returns is not unreasonable, the timing of it is a direct result of the clear fiscal pressure facing this government. Guard rails appear sensible and subject to independent oversight.

However with businesses historically providing around 80% of investment, the big question is whether corporate profitability will be weakened that they no longer wish to hold up their end of the bargain to such an extent.