Issue four | A traditional Labour Budget: at what cost?
By Rt Hon Jonathan Ashworth, UK Chairman of Public Affairs at Weber Shandwick
The accidental release of the OBR’s Budget assessment – half an hour before the Chancellor addressed Parliament – was a gift to headline writers already feasting on weeks of chaotic briefings and leaks. For Rachel Reeves, whose frustration with the OBR was already evident, the anger was unmistakable. It was hardly the ideal prelude to a Budget in which she needed to perform a high-wire act.
Reeves had three audiences: the markets, who needed confidence she could grip borrowing and tame inflation; voters, who expected action on the cost-of-living pressures they face daily; and Labour MPs, who wanted reassurance of a distinctly Labour agenda.
After several difficult months, No. 11 believes it managed to satisfy all three – whatever the morning newspapers say. The question is: at what cost?
The giveaways
Freezing rail fares and prescription charges, taking £150 off energy bills, extending the fuel duty freeze and launching a new “Fuel Finder” tool to help reduce what motorists pay at the pump is viewed by the government as a package to help cut next year’s inflation forecast by 0.4 percentage points – the largest near-term reduction attributed to government policy the OBR has ever projected.
Keir Starmer promised a “Labour Budget based on Labour values,” and now we know what that meant: scrapping the two-child limit, lifting 450,000 children out of poverty; raising the National Living Wage by 4.7% to £12.71; and increasing the minimum wage for under-21s by 8.5% to £10.85.
The trade-off: higher taxes
Faced with missing her fiscal rules and losing the confidence of the markets, the Chancellor had only two options: cut spending or tax more. She chose tax rises, despite her 2024 campaign promises not to increase the burden on working people, unveiling £26bn of additional revenue measures. The result is an all time high for the tax burden – 38 per cent of GDP by the end of the parliament.
Labour MPs on the airways insisted the party has kept its income tax promise. However, extending Rishi Sunak’s freeze on income tax thresholds until 2031 pulls 940,000 more people into the 40% rate and drags another 780,000 into basic-rate, including pensioners reliant solely on the state pension, (which again rises generously under the triple lock).
The Chancellor also drew widely from the tax “smorgasbord”: higher gambling levies, increased taxes on landlords and dividends, a mansion-tax-style surcharge on £2m+ properties, a 3p-per-mile duty on EVs, closing the TOMS VAT exemption for private hire taxi services.
Salary sacrifice schemes for pension saving were curtailed, leaving employers and employees with higher National Insurance bills – raising £4.7bn for the Exchequer but likely reducing pension saving and therefore long-term investment. At the same time the tax-free allowance on cash ISAs is also restricted to encourage more investment through stocks and shares ISAs.
Political response
The response from Kemi Badenoch was excoriating, attacking a budget that puts “tax up and welfare up”. Nigel Farage called it “an assault on aspiration and savings.” Labour’s strategists, however, believe they have drawn a defining line for the next election: investment and affordability under Labour versus spending cuts and tax breaks for the wealthy under the Conservatives and Reform.
Markets, business and growth
For now, the package has reassured investors despite borrowing remaining higher for the next three years, falling only from 2029–30. Nonetheless, gilt markets held steady and 10-year borrowing costs edged down. However, with many tax rises scheduled for late in the Parliament or after 2029, credibility questions may resurface.
Reeves promised the most pro-business government in history. However, after last year’s bruising NICs rise, was there much for business to welcome?
The Youth Guarantee (a guaranteed six-month work placement) and full funding for SME apprenticeships for under-25s will be welcomed. Construction benefits from the decision not to converge Landfill Tax rates. Retail sees a mixed picture: a cut to retail business rates offset by a higher rate on properties valued at £500,000 or higher. Scrapping the de minimis loophole will level the playing field but its delay until 2029 will be met with frustration, although consumers may be pleased.
The wider outlook
Economic growth remains subdued, averaging just 1.5% in the coming years – below previous forecasts. Much now depends on a recovery in growth to avoid harsher decisions as the 2029 election approaches.
After a very rocky few months, the Prime Minister however feels the Budget allows him to get back on the front foot politically.
Addressing Labour MPs on Wednesday night, Keir Starmer said he entered politics to deliver a budget like this. It is unmistakably a traditional Labour package – and the political dividing lines are now clearer than at any point since the election.
Former Labour MP for Leicester South, Jonathan was a long-standing senior member of Keir Starmer’s shadow cabinet and played a central role in the Party’s 2024 general election campaign.
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