Reeves’ budget raises taxes, expenditure

British Chancellor of Exchequer Rachel Reeves, first woman to hold the post, has on Tuesday delivered the first Labour Budget in over a decade, and it carries the hallmarks of a Labour Budget, not of the New Labour of Tony Blair-Gordon Brown vintage of 1997, with its unabashed traces of Thatcherism.

Reeves has increased budgetary allocations to the National Health Service (NHS), to state schools in Britain and to housing. And she has imposed VAT on the private schools with the argument that 94 per cent of children attended state schools.

She has also increased the employers’ contribution to National Insurance from 13.8 per cent to 15 per cent, and she has put back into the workers’ pension fund the surplus funds that government had taken off in the last many years. She has raised taxes by 40 billion pounds, and 500 million pounds has been allotted to the National Wealth Fund, which is expected to increase investment expenditure in Britain.

In many ways Reeves’ budget is the exact opposite of the short-lived Conservative Prime Minister’s Liz Truss’s disastrous budget with all stops pulled out to encourage capitalists to invest in Britain. Observers have however noted that Reeves did not go in the diametrically opposite way to Truss’ budget. She has shown sufficient restraint in letting the threshold on capital gains tax till 2030, two years beyond the 2028 promised by the previous Tory government. Former Conservative Prime Minister Rishi Sunak hit out at the budget proposals and said that it had taxed everything and it has left no scope for investors to put money in Britain.

Reeves’s budget has in many ways opened up the general debate on the economic model to follow, whether it should be that of the free markets where low taxes would be an incentive for the capitalists to invest in the economy and help boost growth, or it should be the model of greater state expenditure, including capital expenditure, to grow the economy and provide enough tax incentives to the poor and the middle class.

In the last decade, the free market has proved to be an ineffective model, especially after the 2007-08 Great Financial Crisis and the 2020-21 Covid pandemic, which has stranded the economy and left the people struggling to pay their electricity bill. It does not however automatically follow that the old model of tax-and-spend policy of governments is the remedy. There is no certainty that Reeves’ measures would help revive the economy, create jobs and help people cope with the economic crisis that they have been facing for the last four years.

Prime Minister Keir Starmer is no hidebound Labour ideologue. He is pragmatic and his criticism of the Sunak government when he was the opposition leader was related to the economic hardship of people rather than on ideology. It is more likely that Reeves will try to manage the economy with a lot of give-and-take, where the wage-earners will not get all the incentives and where the rich folk will not have to fork out their extra wealth without any relief. There is enough nuance in Reeves’ taxation measures.

But the test of the pudding lies in whether Reeves’ budget will help Britain recover its economic strength and status. Britain has slipped from its position as the fifth largest economy in terms of the GDP, which is now taken by India, and it now stands one rung lower at the sixth position. Britain would certainly want to remain part of the rich countries’ club of G7, and it has to power its economy enough to remain in the same place. That is a challenge in itself. Starmer has won the election convincingly. He has now the tougher task of ending the fall of Britain as an economic power.