106. How Much Pain Is Rachel Reeves Inflicting?

0:10Hello and welcome to a budget special, Rest is money with me Robert Peston. and me Steph McGovern now there is absolutely loads to chew through here so Robert where should we start you've been with Rachel Reeves today I mean it was a hell of a moment for her I have to be honest I actually got a bit emotional when she got up to do the budget because I just thought I can't believe it's taken 800 years for a woman to do this you know whatever your politics or whether we agree or don't agree with whatever she said and all the policies just from a empowerment there's a woman stood there doing it I did get a bit emotional yeah I mean I actually did put this to her in the chat we had which is going out on on my Peston program and you know I said you know heavy is the crown and uh how does it feel to be the first woman chancellor and she said I don't know if you agree with this she said for her this was the last glass ceiling yeah that for her all the other sort of important glass ceilings for women had been shattered and it is sort of incredible actually if you think about it that we've had three female prime ministers and never a woman chancellor it's it's um it's an odd thing isn't it that that all the sort of money stuff the preserve you know it's been a man's game forever i sort of you know i have to say we might not be in there'd be more women chancellors maybe the economy would be in better shape who knows well yeah let's see and should we should we have a chat then about what was actually said because you know biggest tax rises we've seen in a long time what what are your thoughts on it what do you want to throw the big numbers at us and tell us what you're thinking yeah um i think it is a very risky budget and I think quite a lot could go wrong.

1:59We'll talk about that later, but let's just go with the headlines. Public expenditure set to rise by£70 billion a year, two-thirds of that going on day-to-day spending. So that's the wages of civil servants and doctors and nurses and welfare payments and pensions. So two-thirds of the£70 billion on day-to-day spending and a third on a significant increase in government investment. I think we might come back later in the podcast to look at whether or not actually they're investing enough. I have my doubts. I actually think investment probably should be higher. And there's a really big concern I have that private sector investment may fall as a result of this budget.

2:41But let's come back to that. Tax is going up by anywhere between 36 and 40 billion pounds a year, depending on how you measure it. And actually, this is a record for modern times. This is a really substantial amount of tax being raised. It's a massive tax raising budget. And then borrowing though, despite the tax rise, is also set to rise by£32 billion a year. It is, in the words of the Office of Budget Responsibility, a significant fiscal loosening. They say outside of absolute intense crisis periods, the most significant fiscal loosening since 1992. Now, what that means, dispensing with the jargon, is that it's a stimulus.

3:31And because it's a stimulus, it means that inflation will be higher than it would otherwise be. So they calculate that inflation would be about a half a percentage point higher than it would otherwise be. And that, of course, means that the Bank of England may well take longer to cut interest rates, which may well mean, I think it will mean this, that mortgage rates will be higher for longer and what businesses pay to borrow will be higher for longer. So to be clear, and we could talk about what she's trying to achieve in terms of higher growth, but in the short term, quite a lot of both households and businesses are going to be feeling pretty uncomfortable as a result of this budget.

4:19We both talked about the record sums that she's raising in tax. Break down for us what taxes are going up. Yeah. So obviously there's a mixed bag of stuff here and pretty much the business world is taking the brunt of them. So we've mentioned the employer's national insurance contributions. That's a big chunk of it, about 25 billion she's hoping to get from that in terms of income tax avoidance we mentioned this before on the show about trying to get all those people who are avoiding tax at least recoup some of that back so there's about six and a half billion she wants to get from that two and a half billion from putting up capital gains tax that didn't go up as much actually as we'd been talking about on the show we were wondering if it was going to be closer to kind of 40 percent for the higher rate.

5:07Well, no, we did. So just to be clear, we did in the latest podcast say very explicitly that she'd backed away from those big tax rises. And for two reasons, this is quite funny, actually. I mean, there are two reasons. One is because there is a fair amount of evidence that if you raise the higher, you raise the rate, the greater the incentive there is for people to find ways to avoid paying it, you actually end up getting less money from a higher rate. And we did point out that we didn't think the rate was going to go up above 24. And in fact, she did put the main rate up from 20 to 24. There is a funny story about that though, which is in the end, she didn't really reform capital gains tax at all.

5:45And there were ways of reforming it to yield more than the 2 billion odd that they're getting from the change. But I'm told, poor old HMRC simply didn't have the capacity to do the analysis. So they just did the simple thing. They just bought the HMRC line that 24 % is optimal. HMRC may be wrong about that. They may There will have been things they could have done to raise more money, but they didn't take the risk. God, that's interesting, isn't it? Also, just in terms of other contributors to these tax rises, then you've got about over$2 billion from inheritance tax, but again, not massive changes, although the farming community are kicking off.

6:20Up in arms. I mean, farmers are basically, you know, I think it kicks in, doesn't it, the higher inheritance tax that you pay if you've got a, is it a farmland worth about a million? Is that right? Right. Yeah. So how it works is it's this agricultural property relief. So you don't pay inheritance tax on the first 1 million. And this is a combined value of your business and assets. But after that, you pay a 20 % rate on half the value of your estate. It's a bit complicated, but basically it means it's going to particularly hit, not necessarily the small owner-occupier farms, but it's more the tenant farms, the bigger farms that might be on these huge operations, but not necessarily wealthy in terms of the business, but their assets are wealthy.

7:03So there's a lot of upset about that. Well, I think a lot of farmers are worried that, you know, these are family businesses, sometimes going back generations. And I think there is concern that a lot of families will lose, you know, these farms that they feel are part of their sort of... Fabric. Yeah. I mean, you know, so I think it is causing upset. And there'll be more to come on that, definitely. Also, we've got, as we know, the private schools, the 1.7 billion that's coming from the VAT there. There's the energy levy that's bringing another billion and then various other bits and bobs, which is about another one and a half billion.

7:41So as you say, it's somewhere between 36 and 40 odd billion. There's a lot of scepticism, though, about whether you'll even be able to bring in that much money from all of those different measures. Well, I think just on one of those, you've probably seen that the oil price has actually been stable at a relatively low level recently. We've just seen profits from BP, which have gone back to levels we haven't seen, fallen to levels we haven't seen in years. So, you know, I wonder whether or not they'll be able to get the money that they want from the increase in the rate of the windfall tax. Because if the profits of these oil companies are falling, then the yield, even with a higher rate of tax, the yield will be lower.

8:26So we'll see whether or not all of these taxes yield what they hope. And then obviously what it's left for everyone to do now is kind of work out how it's going to impact then. I've been doing that this afternoon. I know you've been talking to lots of different people about this. I've been talking to my, I'm mentioning the slime business again, everyone, but I've been talking to the guy who I co-own the business with. And, you know, it's a bit of a mind melt trying to get our head around it because it's working out all the different tax changes and allowances. So can I ask you a question? So one of the things, you know, Rachel Reeves insists on, she said it in the House of Commons.

9:05She said it again to me when I chatted with her this afternoon is they put in place sort of protections for the smallest businesses. And she says that if you employ four people on minimum wage, you will not pay national insurance. How many people do you employ? Because you're definitely not a big business. So how many people do you employ? No, we're not. No, we're a small business, but we employ about 20 to 25 people, depending on the time of year and how busy we are and everything else. There are three full-time people and then there are quite a few who are nearly full-time. But we have a lot of 18 to 20-year-olds.

9:45You know, we're in retail. So we've got a lot of the kids who, they'll kill me for seeing kids, but we've got a lot of the young people who, you know, are between education or training or whatever and they come to work for us for a bit. And you pay minimum wage? So we pay minimum wage. That's obviously going up to£10 an hour. I don't disagree, by the way, with minimum wage going up, but that's 16%. It's an increase in our wage bill of at least 16%. And then obviously the lowering of the national insurance threshold means that we will now have more people to pay national insurance contributions on.

10:20And you've mentioned the employment rate allowance. So, you know, on that examples given of if you employ four people full time and minimum wage, you won't pay it. it's worked out based on how much the cost your bill is for national insurance if it's more than ten and a half thousand pounds a year that you need to pay national insurance then you have to pay national insurance for them but if it's less than that you don't you're exempt from it through that employment rate allowance so we're just trying to work it all out now but it looks like we will be well above that so we will have to pay that and again you know i don't i'm not saying we shouldn't we would keep talking about the broader shoulders and all that they should be the ones to pay i don't disagree that businesses should pay where they can but it's a hell of a lot of an increase all at once you know and it's less money for investment it might mean that we don't employ as many people so it's all of these things now and it's dead complicated we've literally spent ages this afternoon trying to just work it all out going right if we have to pay so and so this much rather we're doing this and we're doing that right there'll have to we'll have to pay and it's just it's hard as a small business owner i'm you know i'm lucky i'm not saying i've got a problem.

11:27I'm very privileged in lots of ways. And obviously I do this job. So I understand it a bit more than most, but for someone who's trying to run a small business and work out whether this is them or not, that's a lot of time. It's a lot of, and you know, I know there are experts out there who help, but again, that costs money to pay people to help you if you need experts or whatever. So it's a lot for small business people to take on. And I, and you're right, that employment rate allowance is good because it'll stop people like my cousin, who's a builder. he was stressing because he employs a couple of lads to do his build jobs with him he actually is within the allowance so he won't pay the national insurance contributions he might have to but you know some of the lads he pays on minimum wage he might have to put up their pay but yes it's just that thing of trying to work it all out isn't it and i'm glad that the smallest of businesses are not being hit but it is a big increase and also but we should be clear about this.

12:20Okay. Yes, there are lots of very small businesses who employ only four people, but there are hundreds of thousands of businesses that are bigger than that. But you've also got the change to the workers' rights on top of it all. That's creating more bureaucracy. It will impact employment decisions. It makes things more complicated. It might mean people take fewer risks with hiring and firing because they won't want to have to go through all that. And so I do think all of this at once. And then the one other thing as well that I haven't even mentioned is business rate relief. Obviously, I think it was since 2020, businesses in the retail, hospitality and leisure sector have benefited from this 75 % relief on business rates.

13:03That was meant to end next year. Rachel Reeves has said, it's not going to end, but the 75 % is not going to happen. It's going to go down to 40%, which is great because businesses were worrying it was going to go completely but from 75 % down to 40 % is still quite a big jump that's another big cost for particularly in sectors where as we say retail hospitality and leisure often face the they're at the the coalface of cost of living crisis that's where you stop spending when people are finding things tough so all of that combined I just think you know I've always been skeptical about whether labour are pro-business and I still am I feel like it was So invest, invest, invest.

13:44And all I heard was tax, tax, tax, business people. Now, one of the problems with what she's done here is, as you point out, that this will have an impact on what businesses pay their people and how many people they will recruit henceforth. One of the really striking things that the OBR calculates is that the government will never get the£25 billion headline rate of tax that it is claiming. And it says that right from the moment it's introduced, businesses will adjust. And one of the ways they will adjust is by giving lower pay increases to their people, not hiring, in some cases where they can, cutting the pay of their staff, so that by year five, according to the OBR, that$25 billion falls to$15 billion, because if there are fewer people in employment or they're being paid less, all of those people pay less tax, right?

14:56So the net yield from this tax is 15 billion pounds. The other way of looking at this, of course, is that this is a very significant tax on the group of people that Keir Starmer promised in Labour's manifesto he wouldn't hurt. This is a very significant blow to working people. And I did talk to Rachel Reeves specifically about the way that even though she claims this is consistent with her manifesto, because it's not a direct tax on working people, it's indirect because it's the employer that pays it, working people will still significantly suffer. And she didn't deny that. And she also slightly gave the game away, in my view, because she also said, but don't forget that there is a flaw on what businesses can pay people.

15:51It's the minimum wage, which also points to another bit of analysis that, for example, the Resolution Foundation has done, which shows that as a result of this rise in employers' national insurance, the people who will suffer most are those on lowest income. Because basically, they've got the least negotiating power. And the businesses that will most struggle to meet the costs of this increased national insurance are businesses in things like hospitality, pubs, restaurants, and the rest, where wages are relatively low. And so the pain will be greatest for those on lowest incomes. Therefore, it does seem a very odd tax change for a Labour government to make, given that this Labour government says it's all in favour of boosting the wages of those on low pay.

16:44It's the point that growth doesn't look like it's going to get much better in the time in Parliament. So all of this, you know. It's not that it won't get better. What happens is it's a sugar rush at the start. you get a bit more growth at the start. But by the end, and this is the really stark conclusion of the Office for Budget Responsibility, is that after five years, by the time of the next election, the size of the economy will be no bigger than it would have been. And so you do slightly ask yourself, my God, you're raising all this taxes, you're doing all this spending. But at the end of the day, the nation won't be any richer.

17:21So where's the incentive for business there? because if you're saying to business, right, we are going to bring in these pretty hardcore tax changes, but it will lift the prosperity of the country and bring you growth, then you'd go get in, right? Okay. We'll take the hit. Maybe not get in, but you would be like, right, okay, we'll take the hit, but there's good things coming, but it just doesn't feel like that's going to be the case. So, and also the other thing that I think slightly disingenuous as well is this, you know, we keep saying this whole thing about working people. It's the fact that, you know, the threshold, she said, you know, they're going to get rid of the threshold, but not until 2028.

17:59But that was Jeremy Hunt's freeze. Let's be absolutely clear about that. You know, that's not a new freeze. No, but my point is she could have lifted that now, couldn't she? Why wait another three years before you do that? Because she needs the money. Yeah, she does need the money. Yeah, yeah. But I still think there's things that I just think are a bit sneaky on that front. But I know she's got a really hard job to do. Yeah, but if you're going to say it's sneaky, that is sneaky of the previous government. You can accuse them of doing other things that are sneaky, but that's not their sneakiness.

18:31That's Jeremy Hunt's sneakiness. I think we've got to be even added here. You do, though, make a really important point about the question of why take the risks associated with increasing tax as much as she's done, borrowing as much as she's done, if at the end of the day, the nation is not going to be wealthier in five years' time. Obviously, I did talk to her about this today. She points out that the OBR does believe, and this is absolutely consistent with the OBR's methodology, that in 10, 20 years, as a result of these investments, so long as the rate of investment remains at this slightly higher level, that the economy will be much bigger.

19:17But way after the election, frankly, as I put to her, quite a lot of people will be dead. But she said, and I admire her for this, that they are trying to do the right things for the long term. And that is the right, you know, we have had too much short termism in government. And it is important that she is investing. And this, I think, almost in the Office of Budget Responsibility report, for me, was the most embarrassing thing for the government that the OBR said. It said as a direct result of this budget, the private sector would reduce its investment, right? Now, you can't get an increase in growth.

20:07You can't get an increase in productivity if the private sector, which is already investing less than is the case in our competitor economies, if the private sector cuts its investment. Why is the private sector cutting its investment? partly because of all the costs going up that we've talked about, national insurance, new employee rights, and partly because of the crowding out of the private sector as a result of this fiscal stimulus, which means, as I was pointing out earlier, interest rates will be higher for longer. But if you remember, because we talked about it a lot, during the general election campaign, all that the prime minister and indeed the chancellor wanted to talk about was the importance of the private sector investing more.

20:52They have just announced measures in a budget which its own official forecaster has said will lead to lower private sector investment. That's pretty devastating for them and for the country. I mean, there's a big trust issue here, isn't there? Because, you know, Kia said before he got into power, when it was put to him about, are we going to need to be more of a kind of European state in terms of being a bigger state with higher taxes, you know, more like continental European countries. He was against that. And he said, and this is a quote, I resist the idea that the first place you go is tax.

21:30The first place you go is growth. But from what we've just said, that is literally the opposite of what is happening. I know, I agree with you. And look, there's so much more to chew over, and I'm desperate to do so, but I think we've got to go for a quick break. Do neither we.

22:13The rest is money. With me, Robert Peston. And me, Steph McGovern. So there's a lot of talk about the OBR's analysis of this, their forecasting. What are your thoughts on it all, Robert? Look, as always, it's an interesting and compelling piece of work that they produced in their analysis of the Chancellor's budget. The thing that I am struck by is that she is not in a position to say, however much she respects the OBR, that they're only one forecaster and she sort of disagrees with them. And the reason for that is she built so much of her own reputation as chancellor by savaging Liz Truss and Kwasi Kwarteng for the way that they sideline the Office for Budget Responsibility.

23:02And she has, in a sense, tried to establish her credentials as a supposedly prudent, sensible chancellor by saying that she will utterly respect the OBR. It's one of the reasons why we've waited so long for this budget. Many of our MP colleagues wish the budget had happened weeks ago. But she said, no, we can't have a budget until the OBR has had a chance to assess all our plans in minute detail. They have to do the work. That's going to take weeks and weeks and weeks. And that's why, even though the election was back on July the 4th, we've had to wait till the end of October for this budget. And by the same token, it means that when the OBR says the economy is going to be no bigger in five years or, you know, hundreds of thousands, potentially millions of people will be poorer as a result of employers' national insurance going up, she can't dismiss that because she has, you know, basically built the OBR up to be the font of all knowledge on all of this stuff.

24:10But she's created this tremendous rod for her own back. I mean, I do think it's conceivable that the OBR, when it comes to growth, may be being a bit too gloomy. But she can't say that because if she says that, she's turning into Liz Truss. Yeah, and she undermines what she said before. What do you think about this carry-on, by the way, about this whole 22 billion black hole and what was and wasn't said? Because I couldn't get my head around this, what the problem was, but they were arguing over whether the OBR did or did not slag off the Tories, basically, wasn't it? So this is one of those really tedious sort of six of one, half a dozen of another arguments.

24:48The OBR wants to stay out of politics. And I suspect the OBR is pretty cross with Rachel Reeves for having gone into this budget the days before saying that the OBR had produced this devastating analysis, which was going to prove, she said. that the Tories had created a black hole in the current year of£22 billion by withholding information from the OBR when it was doing its last budget. What the OBR has said today is there is not£22 billion, there's£9.5 billion of potential overspends that if it had been told about those potential overspends, then it would have produced different forecasts for the then-Chancellor, Jeremy Hunt.

25:48But it doesn't say, for example, that it accepts that all of that$9.5 billion would have been added to public spending and that therefore the Chancellor would have had$9.5 billion less. It just says it would have wanted to have had a conversation with the Chancellor about how he at the time would have funded that money. So what I would say is the OBR is being critical of the previous government in terms of the information that it provided, but it's not being as critical as Rachel Reeves claims. And one of the things that has been blindingly obvious about all this for some time is that half of that 22 billion anyway was or around half was anyway just a decision Rachel Reeves made after the election which was that she was going to accept the recommendations of the pay review bodies on putting up public sector workers teachers nurses pay and all the rest of it and that was a choice that she made now you know let's be clear Jeremy Hunt might or might not have made the same decision I've spoken to him multiple times about it and he says he might have put the pay up of public sector workers, but he would have demanded changes in working practices, which this government hasn't done.

27:03It would have demanded improvements in productivity, which this government hasn't done. So there is an interesting debate around, essentially, whether the government was right to put up public sector workers' pay without demanding reform. But the point is, yes, the previous government misled or let down the OBR, but not to the tune of 22 billion. Just on the point of public sector pay, actually, you know, we were talking about these national insurance contributions made by employers. Rachel Reeves didn't say anything about it, not including the public sector, did she? So this is going to be, I know essentially that money is going to come back into the public purse if it's paid out to employees who work in the public sector.

27:49But that's still going to put up their pay quite considerably as well in terms of costs for those departments, isn't it? Yeah, look, in the round, it's completely circular. If the headline yield is 25 billion, then I think the calculation is about 5 billion of this comes from public sector workers. Right. And all that means is, yes, it's an increased cost for the public sector employers. but it just goes into the treasury pot and gets recycled. So it means that the net take is 5 billion less than it would otherwise have been. And that's putting to one side all the stuff I talked to you earlier about when it comes to reasons why the yield would anyway, you know, be about 10 billion less just because, you know, employers in the private sector are going to cut pay and cut workers.

28:39But you're right, you've hit on an interesting point, which is, of course, in order for it to be, to completely come out in the wash, you would have to assume that the 5 billion that is coming from the, whatever bit of the 5 billion is paid by the Department of Transport just goes back to the Department of Transport. And we can't know that because although we've got spending allocations for 2526, we are going to have to wait till the spring to get spending allocations for the subsequent two or three years. So it is the case that this may make some departments a bit poorer than they would otherwise have been, as you say.

29:24But for the public sector as a whole, it's sort of irrelevant. The other thing I wanted to, I feel like it's like an audience with pest in this. I've got more things I want to ask you. Right. So my other thing is around how front loaded the spending is. So as you've explained today on the telly brilliantly, the public spending increases are very front loaded in next year and the year after and then they reduce significantly after that so that means the nhs in particular is going to get all this money all of a sudden but that's not going to suddenly solve like the skills problem that there is in that sector and we've talked before and west street has even said it hasn't he it's not about money suddenly going to the nhs it's just as much about reform and that's going to take time you Even things like if it's to buy new equipment, you don't just buy a piece of equipment and get it the next day.

30:14All of these things take a lot longer. So I just wonder if money's going to be wasted because departments in the NHS or wherever are going to go, right, we've got all this money, we better make sure we spend it. And we've all worked for companies who've done that. When they've got close to the end financial year end and there's a bit of money left, they're like, quick, spend it because we don't want it to come off our department next year. So I just worry that this is actually, although it's really good to know that the NHS is being really taken seriously in terms of investment, it might be wasted if a rush job is done on pumping it all in.

30:51So I don't know whether enough money is going into the NHS to cause the kind of inflation in terms of equipment and wages that we did see, you know, after 2002, 2003, when Blair and Brown massively increased by much more, actually, over a period of years, contributions to the NHS. I mean, there's no question in my mind, if you go back to the Blair Brown period, that quite a lot of the money they invested in schools and hospitals was wasted because, for example, suppliers of equipment just basically saw the government as a soft touch and they jacked up prices because they could see that the NHS had money to burn.

31:38And it meant that in the end, hospitals, us as taxpayers, didn't get value for money. But I don't think given the sort of crippled state of the NHS at the moment, and given how much money is going in, I don't know whether some of it is going to be burned by that kind of rapacious behavior by suppliers, burned away inflation. And it's one of the things that's interesting to me, and I haven't really had a chance. We're going to talk to Rachel Reeves about this in one podcast tomorrow. We're also going to interview a tremendous expert on all this, Andy Haldane, who's been on the former chief economist at the Bank of England, who's been on this podcast before.