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.
The briefing paper 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.
