The First Labour Budget

Labour are stuck between a rock and a hard place. How will they fare with their first budget?

The beginning of Starmer’s premiership has, at its best, been slow, and at its worst a disaster. The new treasury team has discovered the state of public finances is worse than expected — a £22bn black hole and a £40bn funding gap in the budget that Labour needs to try and plug. What’s more, within weeks of entering office, the new Labour administration has been mired by scandal, with the Prime Minister himself having to repay six thousand pounds worth of clothing provided by Labour donor Lord Alli. All this has led to Starmer’s personal ratings sinking to lows only thought possible via Trussenomics.

However, on 30 October, Labour can change its fortune. Chancellor of the Exchequer Rachel Reeves will unveil her first budget, the first Labour budget since 2010, and give Labour the chance to persuade the public that they are in fact the change the country needs.

This budget is one of the most contentious and closely watched since the financial crisis. With public services crumbling and economic growth stagnant, Labour has the rather difficult task of getting growth up, keeping inflation down, whilst attempting to rebuild services which the Tories spent their administration gradually steamrolling — nothing too complicated then.

The Labour election manifesto gave some insight into how the budget may look: Starmer’s government intends to end VAT exemptions for private schools, close tax loopholes for non-doms, as well as keep taxes on “working people” the same. Labour and Reeves made it particularly clear throughout the campaign that taxes on “working people” wouldn’t go up — income tax, national insurance and VAT would remain the same. Despite this, tax changes do appear to be the name of the game, with Starmer stating that “those with the biggest shoulders” should expect the biggest burden. 

In recent days the treasury has indicated that they are looking to raid assets, with much being made about potential increase in Capital Gains (CGT) and Inheritance Tax. CGT is expected to increase for sales of shares but not for second homes — which is currently at 20%. Much speculation has occurred on the specifics — Starmer this week has dismissed suggestions of a 39% rate as “wide of the mark”, and the increase will likely be more modest. Inheritance tax specifics are less clear, but Chief Secretary to the Treasury Darren Jones has previously suggested that inheritance tax could be used to address “intergenerational inequalities” and “redistribute wealth”.

Much has been made by Labour about its so-called fiscal rules, which Reeves has said are iron clad, and limit borrowing and spending. Currently, borrowing is being very tightly controlled by said rules, with the Chancellor set to tweak the rules to allow borrowing for investment. Hoping that, in partnership with businesses, public services and infrastructure can be supplied with long-needed investments. 

Pensions and pensioners will be hit. As aforementioned, Labour allegedly plans to bring National Insurance to employers, taxing pension contributions. This has been criticised by economists, with some suggesting that this could lead to lower employer pension contributions, as well as potential wage stagnation. In addition to this, The Telegraph claims that Labour could cut the tax-free pension rate down to £100,000. Much has been made about Labour policy on pensioners, with recent Winter Fuel Allowance cuts being widely criticised, but polling figures amongst the generally right-leaning age group may allow Labour ministers to put such criticisms to the back of the mind  — for now.

But will it work, and will it be popular? The government needs significant capital, and calls to levy income tax on high earners or corporation tax increases have been roundly ignored. Fears of capital flight, and the financial markets that Labour have always struggled to navigate, mean that Reeves will hope to strike a balance. However, with treasury figures suggesting the total deficit could be up to £100bn in the coming five years, Reeves and her team have a mammoth task to overcome.

Now, will it be popular? To be frank, no. There will be no quick fixes, so other than slashing alcohol duty or scrapping ULEZ measures, not much could be done to really improve the government’s standing with the public.  But an end to Tory era spending (or lack thereof) can only be seen as a good thing and having a treasury, and more broadly a government, that believes in investment and an active state could mean a little light on the horizon for Labour, and for the country.