- Following Rachel Reeves’ Budget on Wednesday, a new report from the Centre for Policy Studies shows that state spending will sit at an astonishing £1.5 trillion by 2029/30
- Labour is also choking off growth, with the Office for Budget Responsibility (OBR) predicting another five years of mediocre growth and squeezed living standards. Instead of topping the G7 growth tables, as Labour hopes, we are set to fall below the average
- The tax burden as a share of GDP is on track to reach the highest sustained level since records began over 300 years ago, with the rise in employer NICs representing one of the largest tax rises on record – the vast majority of which will fall on working people
- The comprehensive analysis shows that Labour’s first Budget offers little optimism for families, workers, and young people.
New analysis from the Centre for Policy Studies shows that, as a result of changes announced in this week’s Budget, state spending is set to increase to an astonishing £1.5 trillion by 2029/30, as reported by the Sunday Telegraph and Sunday Express.
The briefing paper – ‘The Age of the Super-State’ – argues that the measures announced by Rachel Reeves show Labour reverting to its traditional view that the state can and should dictate the direction of the economy, with the Office for Budget Responsibility (OBR) projecting meagre growth and stagnant productivity as a result. The result is that private business investment will be crowded out, in favour of the state attempting to pick winners.
Unless Labour’s planning reforms deliver an unexpected growth bonanza, Britain faces another decade of virtual stagnation in living standards, which will result in Brits in 2029 being around £10,000 poorer than they would have been if GDP per capita growth had rebounded to the pre-2008 trend.
The OBR projects that UK GDP growth will average a meagre 1.6% between 2024 and 2029 period, with GDP per capita averaging around 1.0%. Far from reaching Labour’s goal of the highest sustained growth in the G7, IMF forecasts predict Britain will sit below the G7 average.
The OBR now projects taxes as a share of GDP to climb to 38.2% by 2029, surpassing the previous record of 37.2% in 1948. CPS analysis of Bank of England records, which go back to the Glorious Revolution of 1688/89, shows that this is also the highest share on record – even counting the World Wars, which were funded largely by borrowing.
Higher borrowing will also fuel a rise in public sector net debt to 95.8% of GDP – the highest level since the early 1960s. The reality of a debt crisis before 2029 is a real possibility, especially if economic growth remains low and interest rates surge again.
The report also highlights:
A Budget focused on welfare, not on work
- Despite what Labour claims, the employers’ National Insurance increase is a tax on workers, especially those on lower pay. OBR predicts behavioural changes due to employer’s National Insurance adjustment will actually raise £10 billion less than Labour claim
- This would likely lead to roughly 52,000 fewer people in work, because of the increased cost for businesses of employing workers
- The Chancellor committed to the triple lock, and other age-related benefits, meaning pensioner spending alone is expected to increase by £40 billion over five years, to £182.7 billion, or 5.3% of GDP
- This will have to be paid for through higher taxes on a shrinking working-age population
An NHS the size of New Zealand
- By 2025/26, the NHS will make up almost 17% of day-to-day government spending
- This £200bn budget for the NHS and social care would be roughly equivalent to the current GDP of New Zealand or Greece
- Meanwhile, previous CPS research has found a negative correlation between NHS spending and productivity increases – so without a sustained programme of reform, we will be paying more and getting less
The end of the Right to Buy
- The Chancellor announced a reduction in the discount for the Right to Buy by around two thirds. Based on past trends, this will cut uptake to approximately zero. An ideological opposition to social tenants owning their own homes has effectively abolished Right to Buy
The death of North Sea oil?
- The increase in the Energy Profits Levy to 38%, and the removal of the North Sea capital investment allowance for most new offshore projects, materially weakens the climate for investment in oil and gas assets. The OBR now expects North Sea investment to be 26% lower. That means fewer jobs in Britain, and greater reliance on oil and gas imported from often unsavoury regimes.
Living standards squeezed, especially for the low-paid
- Real household disposable income per capita is expected to grow by just 0.5% per annum between 2024/25 and 2029/30. While the minimum wage will rise, there is a strong risk that – coupled with the decision to increase employer’s NI and lower the threshold – low earners will struggle to find work. Indeed, the OBR estimates point to 52,000 fewer jobs as a result of the measures in the Budget. The Budget measures will also increase economic inactivity, despite Labour’s commitment to tackling the problem.
CPS Director, Robert Colvile said:
‘This is a Budget which privileges the public sector over the private sector – with the impact on growth that you’d expect from that. The OBR is clear that the Budget will hit private sector activity, which is exactly what you’d expect when you load a £25 billion tax rise on to business and employment.
‘More worryingly, this Budget significantly accelerates Britain’s journey to being a high-tax, high-spend nation, with both tax and spending left at historic highs, on top of uncomfortably large levels of borrowing.
‘The Government’s best hope is that its planning reforms unleash an unexpected tidal wave of growth and investment, but in its absence we are set for a painful, miserable few years – with a severe pinch point in the third year of the forecast, when the spending taps are turned off, spending discipline tightens significantly under the new fiscal rules, and income tax thresholds at last begin to rise again.’
ENDS
NOTES TO EDITORS
- ‘Budget Briefing: The Age of the Super-State’ is available to download here
- Previous CPS reports relating to announcements in the Budget include:
- Capital Losses: Why increasing CGT will deter investment, slow growth and reduce revenue
- The UK’s International Tax Competitiveness: 2024 Update
- Why Choose Britain?
- For further information and media requests, please contact Emma Revell on 07931 698246 & [email protected] or Josh Coupland on 07912485655 [email protected]
- The Centre for Policy Studies is one of the oldest and most influential think tanks in Westminster. With a focus on taxation, economic growth, business, welfare, education, housing and green growth, its goal is to develop policies that widen enterprise, ownership and opportunity.
Date Added: Sunday 3rd November 2024
