Budget 2025: Three things Rachel Reeves’s speech boils down to – and two tricks the chancellor will fall back on
This is going to be a big budget – not to mention a complex budget.
It could, depending on how it lands, determine the fate of this government. And it’s hard to think of many other budgets that have been preceded by quite so much speculation, briefing, and rumour.
All of which is to say, you could be forgiven for feeling rather overwhelmed.
But in practice, what’s happening this week can really be boiled down to three things.
1. Not enough growth
The first is that the economy is not growing as fast as many people had hoped. Or, to put it another way, Britain’s productivity growth is much weaker than it once used to be.
The upshot of that is that there’s less money flowing into the exchequer in the form of tax revenues.
2. Not enough cuts
The second factor is that last year and this, the chancellor promised to make certain cuts to welfare – cuts that would have saved the government billions of pounds of spending a year.
But it has failed to implement those cuts. Put those extra billions together with the shortfall from that weaker productivity, and it’s pretty clear there is a looming hole in the public finances.
3. Not enough levers
The third thing to bear in mind is that Rachel Reeves has pledged to tie her hands in the way she responds to this fiscal hole.
She has fiscal rules that mean she can’t ignore it. She has a manifesto pledge which means she is somewhat limited in the levers she can pull to fill it.
Put it all together, and it adds up to a momentous headache for the chancellor. She needs to raise quite a lot of money and all the “easy” ways of doing it (like raising income tax rates or VAT) seem to be off the table.
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The Budget Explained – in 60 seconds
So… what will she do?
Quite how she responds remains to be seen – as does the precise size of the fiscal hole. But if the rumours in Westminster are to be believed, she will fall back upon two tricks most of her predecessors have tried at various points.
First, she will deploy “fiscal drag” to squeeze extra income tax and national insurance payments out of families for the coming five years.
What this means in practice is that even though the headline rate of income tax might not go up, the amount of income we end up being taxed on will grow ever higher in the coming years.
Second, the chancellor is expected to squeeze government spending in the distant years for which she doesn’t yet need to provide detailed plans.
Together, these measures may raise somewhere in the region of £10bn. But Reeves’s big problem is that in practice she needs to raise two or three times this amount. So, how will she do that?
Most likely is that she implements a grab-bag of other tax measures: more expensive council tax for high value properties; new CGT rules; new gambling taxes and more.
No return to austerity, but an Osborne-like predicament…
If this summons up a particular memory from history, it’s precisely the same problem George Osborne faced back in 2012. He wanted to raise quite a lot of money but due to agreements with his coalition partners, he was limited in how many big taxes he could raise.
The resulting budget was, at the time at least, the single most complex budget in history. Consider: in the years between 1970 and 2010 the average UK budget contained 14 tax measures. Osborne’s 2012 budget contained a whopping 61 of them.
And not long after he delivered it, the budget started to unravel. You probably recall the pasty tax, and maybe the granny tax and the charity tax. Essentially, he was forced into a series of embarrassing U-turns. If there was a lesson, it was that trying to wodge so many money-raising measures into a single fiscal event was an accident waiting to happen.
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Can the budget fix economic woes?
Except that… here’s the interesting thing. In the following years, the complexity of budgets didn’t fall – it rose. Osborne broke his own complexity record the next year with the 2013 budget (73 tax measures), and then again in 2016 (86 measures). By 2020 the budget contained a staggering 103 measures. And Reeves’s own first budget, last autumn, very nearly broke this record with 94 measures.
In short, budgets have become more and more complex, chock-full of even more (often microscopic) tax measures.
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In part, this is a consequence of the fact that, long ago, chancellors seem to have agreed that it would be political suicide to raise the basic rate of income tax or VAT. The consequence is that they have been forced to resort to ever smaller and fiddlier measures to make their numbers add up.
The question is whether this pattern continues this week. Do we end up with yet another astoundingly complex budget? Will that slew of measures backfire as they did for Osborne in 2012? And, more to the point, will they actually benefit the UK economy?
Business
JPMorgan Chase unveils plans to build new £10bn ‘landmark tower’ in London – double the size of The Shard
Plans have been announced for a new “landmark tower” in London with double the floor space of Britain’s tallest building, The Shard.
JPMorgan Chase unveiled details of the proposed office block after banks escaped having their taxes raised in the budget earlier this week.
The US multinational bank said the new building in Canary Wharf, in the east of the capital, would have a floor space of three million square feet. The Shard, in London Bridge, covers 1.3 million square feet.
However, the final design of the tower, including its height, is still being finalised.
A spokesperson for the firm told Sky News that they hoped to have clarity “soon” on how tall the building would be and the number of storeys. But it is expected to be one of the biggest office blocks in Europe.
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JPMorgan Chase boss Jamie Dimon reportedly signed off on the plans late last week.
It came after Sir Keir Starmer’s business envoy Varun Chandra flew out to New York to personally “offer assurances about the government’s business-friendly policies,” the Financial Times reported on Friday.
The Shard is the tallest building in western Europe. Pic: Reuters
The company also warned in a press release that its plans were “subject to a continuing positive business environment in the UK”, as well as planning permission from local authorities.
JPMorgan Chase said the project could contribute up to £9.9bn to the UK economy over six years, including by generating 7,800 jobs, many of them in the construction industry.
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The tower would house up to 12,000 people and serve as JPMorgan Chase’s main UK headquarters and its most significant presence in Europe, the Middle East and Africa.
The firm, which employs 23,000 people in the UK, said the tower would be “one of the largest and most sophisticated in Europe”.
The building is being designed by British architects Foster and Partners, known for landmarks projects including the new Wembley Stadium and London’s Millennium Bridge.
Mr Dimon said: “London has been a trading and financial hub for more than a thousand years, and maintaining it as a vibrant place for finance and business is critical to the health of the UK economy.
“This building will represent our lasting commitment to the city, the UK, our clients and our people.”
Mr Dimon added: “The UK government’s priority of economic growth has been a critical factor in helping us make this decision.”
Chancellor Rachel Reeves said she was “thrilled” about the announcement, while Mayor of London Sir Sadiq Khan said it represented a “huge vote of confidence in the capital’s future”.
Business
‘Sticking to Labour manifesto pledge costs millions of workers’, Resolution Foundation says
Sticking to Labour’s manifesto pledge and freezing income tax thresholds rather than raising income tax has hurt low- and middle-income earners, an influential thinktank has said.
Millions of these workers “would have been better off with their tax rates rising than their thresholds being frozen”, according to the Resolution Foundation’s chief executive, Ruth Curtice.
“Ironically, sticking to her manifesto tax pledge has cost millions of low-to-middle earners”, she said.
Chancellor Rachel Reeves announced in her budget speech that the point at which people start paying higher rates of tax has been held. It means earners are set to be dragged into higher tax bands as they get pay rises.
The chancellor felt unable to raise income tax as the Labour Party pledged not to raise taxes on working people in its election manifesto.
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Budget: What does the public think?
But many are saying that pledge was broken regardless, as the tax burden has increased by £26bn in this budget.
When asked by Sky News whether Ms Reeves would accept she broke the manifesto pledge, she said:
“I do recognise that yesterday I have asked working people to contribute a bit more by freezing those thresholds for a further three years from 2028.”
“I do recognise that that will mean that working people pay a bit more, but I’ve kept that contribution to an absolute minimum”.
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The Resolution Foundation thinktank, which aims to raise living standards, welcomed measures designed to support people with the cost of living, such as the removal of the two-child benefit cap, which limited the number of children families could claim benefits for.
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The announced reduction in energy bills through the removal of as yet unspecified levies was similarly welcomed.
The chancellor said bills would become £150 cheaper a year, but the foundation said typical energy bills will fall by around £130 annually for the next three years, “though support then fades away”.
More to come
This budget won’t be the last of it, Ms Curtice said, as economic growth forecasts have been downgraded by independent forecasters the Office for Budget Responsibility (OBR), and growth is a “hurdle that remains to be cleared”.
“Until that challenge is taken on, we can expect plenty more bracing budgets,” she added.
It comes despite Ms Reeves saying as far back as last year, there would be no more tax increases.
Ultimately, though, the foundation said, “The great drumbeat of doom that preceded the chancellor’s big day turned out to be over the top: the forecasts came in better than many had feared.”
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