332. Rachel Reeves' Budget: How does it affect you?

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1:51Welcome to the RESTAS PONGEX with me, Anastak Campbell. And me, Rory Stewart, and we're here doing a budget special. Anastak one of the things you have often commented on is the way in which the budget is really the center point in many ways for this new Labour government. And it's been a very long delayed budget. You've pointed out that often in the past budgets happen just a month or two after. Governments come in, this is nearly four months after. So everybody really waiting for it. And maybe if we can start a little bit with what it feels like politically, how you feel it's landed, how it's been presented, and the maybe we can move on a little bit into the gritty content of the economics.

2:27Well, I think it's a much bigger budget than we expected. I think it's in many ways a lot bolder. And I think what it's done is laid down the really big political and economic divide in lines with this parliament. Frankly, whoever the Tories electors their leader. I think the right wing in our politics is going to give it a pretty universal thumbs down. And it'll just projected as tax spend borrow, hit on employers, hit on energy companies, capital gains, inheritance tax, the AT on private schools, etc. I thought I was fascinating yesterday was that both sides, Rachel Reeves, Labour -backed ventures, Rishi -Soon -Actori -backed ventures, both sides seemingly to me genuinely cheering what they'd heard from their own side.

3:14And that sells you gone other days when we can say there's not much difference between the parties. And I think the left of politics sees this very much as a Labour budget, more spending on health or schools or special education, these on defence, but also on infrastructure and transport. And the big, big message you were trying to get out was this sort of driving investment up to 100 billion over five years. Now most of the individual decisions that were announced, much to the annoyance of the speaker and the deputy speaker who gave the front bench a bit of a bollocking before the whole thing kicked off, most of these decisions have already been trailed.

3:51Yeah, can I just on that one before you get onto one big surprise? I mean that really fascinated me. I was struck by the fact that Chris Mason from the BBC, for example, before the budget was saying, expect big tax rises, more borrowing, more public services and investment. And that really surprised me because of course the narrative only during the election would have been no big tax rises, no big borrowing, and not much more money going into anything. So they achieved something really remarkable to land the conventional wisdom with the BBC and others before the budget even happened that what people should be expecting is not what was said during the election, which is no tax rises, no borrowing, but instead big tax rises, big borrowing, big spending.

4:30Is that right? Yeah, yeah. How did they manage that? How did they manage to get achieved that? I think partly by annoying the speaker. In other words, so if you think of it, some weeks now where we talked about this on the podcast, that's stuff in the financial times about changing the fiscal rule to allow more borrowing. So once you say you rely more borrowing, well, what's that going to be about? That's going to be about more spending and more investment. How are you going to pay for that? Well, they've absolutely flat ruled out austerity. They're not going to do that. So therefore you talk about tax rises and it's almost like the debate became, maybe I was wrong when I said that I filled the gap between the election, the budget was too long because babyhood is done is allowed the Chris Mason's of this world slightly to forget right, the exact framing.

5:15No one person who did not forget was Rishi Soonak, who absolutely had this line broken promise after broken promise and it's working people who will pay the price. So couple of things. I mean, firstly, it also seems to be I'm talking from Sydney, a version of what you pointed out was Anthony Albanese, the Australian Prime Minister of Strategy, which was to say no tax rises during the election. And then as you pointed out, he then brought in tax rises after the election as you pointed out got away with it. My sense is that they're likely to get away with it. There's not actually as much outrage as you would expect, particularly from journalists.

5:46There was from Rishi Soonak, but maybe because they prepared the ground that there wasn't a sort of bolt of lightning from the sky. Oh my goodness, we can't quite believe they've done this. I wonder as well whether the right of the, he might have taken it rather personally that they were putting VAT on private schools, taking away the non -dobs status as you made a big deal about added tax on private jets. But I think the one big surprise that we hadn't seen coming, in tax ban thresholds, to rise in line with inflation after 2028. So that non -indexation is actually one of the best ways to help people on lower incomes.

6:26And I wonder, 2028, that's saying to me around about the time of the next election, and awful lot of people on lower wages are going to be seeing the benefits of this budget. Got you. I thought that, you know, the numbers were really big. And also the scale of the mess that they said they were inheriting, this fiscal mess they were inheriting. And I don't know, once you get into these big numbers, I know you're going to get some detail of the decision. But what about 40 billion pound tax rises, 70 billion pound extra on spending, borrowing up 20 billion. These are huge numbers. Nobody can say this is a big budget.

7:04And just on the tax rises, I mean, your two heroes, Paul Johnson of the IFS and Dan Needle of Tax Guy, they both say they would have preferred to have seen a rise on the basic rate of income tax by 2p or more. But that of course would have been absolutely blatantly going against the manifesto. Then you had Jeremy Hunt who cut national insurance for employees last parliament. Labour said they weren't going to reverse that. So they've kind of just, you know, they put it onto employers. And it's a big hit. There's no doubt about it. If you're looking for 40 billion you're not going to find it down the bottom of the proverbial sofa.

7:40The national insurance change is 25 billion pounds a year. And that's the biggest chunk of this 40 billion tax rise. And it is a hit on employers. But I was, I was interested. I was channel hopping a little bit after the event. I saw the new director general, the British Chambers of Commerce, Chivore and Haveland. She kept saying I'm determined to see the big picture. I think the big picture is good, provided this investment happens, provided they bring for this money. Yes, so this national insurance change is going to, you know, will have an impact upon businesses. But it was a very interesting, slightly muted attack, I thought.

8:18I'd love to come back to the question of the politics this because I think it is really interesting and how they presented and how they did it and talk a little bit about budgets that have gone wrong. But let's just, um, for listeners that haven't been geeking out quite as much as you have and some people have on the budget. Just to run through what it is. So as you've said, the top line is this is a really big bold budget. And it's big bold because it's putting taxes up considerably. It's borrowing a lot of money and it's spending a lot of money. In other words, it's the sort of budget that you would expect from a slightly more left -wing government coming in, as opposed to a right -wing government coming in.

8:53Yeah. And one way of framing it is that it's doing what I suspected that he wanted to do. I don't remember when I was talking to Rachel Reeves and Bridget Phillips and I kept saying, presumably what you want to do is create a more kind of Scandinavian economy where the government taxes more, spends more and the public sectors bigger. And they slightly shied away from that. But that's what they've broadly done. Britain has always been an outlier in Europe. So we've always spent less than 40 % of our GDP in government spending. This will take us up to closer to 45 % of GDP regularly spent by the government, which is much closer to the European average.

9:32We're still in the middle of the pack though and we're not we're not kind of outliers at all. Absolutely. In the middle of the pack, not crazy extreme, but it's definitely a move in that direction. And it's a big change for Britain. And it's as you say on the dividing line, you talked about dividing line between conservatives and labour. What Rishi Sunak chose to do in his response? People who watched his response after rather sort of complicated intervention by the deputy speaker where she rattled through a series of amendments and laws and then contacts he then came in and basically as you said said these guys lied, they brought their promises.

10:03What though you can expect the conservatives, I guess, to say a little bit more of in the future and I'd be interested why they didn't say it on the budget day is that we disagree with this economic philosophy. So what they would try to say, I guess, is that this higher borrowing might make the government more vulnerable to future shocks. It's one kind of argument. Second argument they might say is yes, the government's going to be spending much more. Capital spending is going to be going up to two and a half percent of GDP. So again, more sort of European government spending more of the economy.

10:33But will the government spend that money correctly? So I guess that would be a right left division. You know, these are going to be good investments. Will it crowd out the private sector? Will it price people out of the labour market? These are going to be the sort of concerns. Can I just pause on that for a second before we go down to many rabbit holes? What's your instinct on why Rishi Sunak didn't make those kinds of objections to the budget, but instead just focused on broken promises? Well, you've got to remember that even though there had been all this stuff trailed, the budget is one of the rare occasions where you see a politician literally have to stand up and genuinely react on his feet.

11:09So there was Rishi Sunak during Rachel Reeves speech. It was a long speech, you know, 75 minutes and more. Rishi Sunak was flanked by Jeremy Hunt and Laura Trott, the Shadow Chief Secretary. You could see that when he had a speech written and he was kind of flicking through just adding in a little bit. So I think he just decided on one line, he was going to hammer that one line. And let's be frank about Rishi Sunak. Although I thought he, you know, by his standards did a pretty good job and it had been preceded by this rather weird love -in between him and Keir Starmer at Prime Minister's questions where they'd been sort of telling each other how marvelous they were before they'd Terry Lubs out of each other in the debate.

11:48But I saw he landed that message pretty well, but look, the guys on the way out the door. I'm just sort of trying to get to the fact that I guess there would be two messages possible for the Tories. One of them is you broke Keir promise. You said you wouldn't raise taxes in bar more than you did. You lied in other words. The other objection would be, well, this is this is the wrong economic policy. We don't like more taxes, more borrowing, more spending. We prefer moral austerity approach. I think where they would be beginning to get to, but very mind when he's making that speech, he has not yet had any time at all to digest the office of budget responsibility report.

12:24Once he saw that, I suspect where he would have elated and where the Tories might now go is on, did you big mission his growth, but actually even by the OBR standards, this is going to give us a bit of growth and then it's going to slow down again. And by the end of it, you're not necessarily growing any more than we are. I think that would have been the message, but I thought what Rachel Reeves did quite well at the end of her speech was frame it very directly to the Tories. If you don't support this, you're either going to have to come up with different tax rises or you're going back to austerity.

12:55And what are the choices going to be? I thought actually just for a minute on her delivery and her persona within the event, because in the Minister's lineup and the helicopter follows you and all that stuff. So they're theatre, but they're also massive strategic punctuation marks in the life of a parliament. And this one, I think, more bigger than most. And I thought she was very, very confident in the way that she put it over. I thought there was a real sense of, I've got this. And I also thought that watching Darren Jones being interviewed later at the Chief Secretary. So he's obviously the guy who's been doing a very, very confident in the arguments he was putting when he was getting the obvious pushback from media.

13:43Whereas I found Laura Trott, who was doing the same tour of the studios, I thought was lacking in confidence because they hadn't yet worked out what their line of talent was going to be. But what I'd like to about it, and you're way right by the way, the public elected a Labour government, probably to the left of the Labour government that I work for under Tony Blair. So they see something like a budget as a means of protecting people on low incomes, increasing the mineral wage and so forth. Yes, trying to create the economic framework for investment, but at the same time with this relentless focus on investment in public services.

14:21One thing back my mind there is trying to work out whether in a sense this was always really what was in the back of Rachel Reeves mind. This approach has a lot of support from economists, right? There are many, many economists in Britain who felt that austerity was the wrong thing, felt that the government should be spending more, should be doing more capital investment, we should be getting our capital investment up, we should be increasing slightly our tax take, we should be investing more in public services and that's the way to grow things. And in fact, that's what Kirsten were basically ran on.

14:48He ran quite left when he was replacing Jeremy Corbyn, and that was his sort of language and rhetoric. But the interesting thing is that I was rewatching interview with Rachel Reeves. And in it, I say to me, you're pretty grumpy that day. Well, it's a fascinating interview when you look at it, right? So I said with NHS, right, how are we going to fund this? And I said, you're going to have to increase in real terms the spending by about 3%. What have they actually done? They've increased public spending by about 3 .3%. So I got it absolutely on the nose. I predicted exactly what they were going to have to do.

15:22And I said, how are you going to be able to do it? Gordon Brown did it by a lot of borrowing, right? So she turns around and she says, I'm not going to take any lectures from a Tory on borrowing. How much did your government borrow? It's not about borrowing. It's about how you run things. And we're going to tax non -dom. So I said to her, but that's tiny amounts of money, right? And she says, five billion pounds. Is that a tiny amount of money? Do you think five billion pounds are... And I said, well, what you're trying to do, it's a tiny amount of money, right? Because she needs to bring in 70 billion pounds, right?

15:51Hey, look, she has bought in 70 billion pounds. So what is it that she's thinking during that interview? Is she sitting there thinking, well, obviously, he's right, I'm going to have to increase borrowing in taxes, but I'm buggered if I'm going to say it on the rest of politics. I think there's something in that. And I guess that there's two things now that are going to happen. The reason why this black hole debate was so important, why they put that down as their early strategic staging post is because in the end, with a very cynical electorate, the parties are going to have to work out, well, where is the blame going to lie for the fact that these taxes have had to go up because we're in such an economic mess.

16:28And the labor of desperate to pin it on the tour is the tour is a desperate to avoid it. And say, as you've just said, labor, we're planning this all along. Now, the truth is, both of those statements can be true. There can be a black hole. And indeed, there is a black hole. And even though Jeremy Hunt got very, very uptight and upset yesterday, when she kept banging on about them being misleading and so forth, the extent to when there's an argument about the numbers, but the OBR has accepted that there was a sort of black hole there that needs to be filled. Yeah, the truth somewhere in between isn't that.

17:00The truth is that there was definitely a black hole, not quite as big as labor said, not as small as the conservative said. Exactly. So that's going to play out. But I think the other thing, I guess what she's thinking there, what you said, what she's thinking is, we've got to win this election. We're probably going to win it anyway, because the tour is in such a mess. However, if you're a labor politician, you know the history and labor party oppositions that have been suggested putting up taxes, the taxes that most concern real people tend to lose. So we're not going to do that. We rule those out.

17:34And so you've got the minvars. And I think what happens? The minvars gets carried along. And people like you and I, very critical, too cautious, why they do more less, more of that. And it's almost like now she's got the minvars across the room. She's planted it in the center of this very nice big office with shelves. And now she says, right, now I'm going to put other stuff around it. It's a big, rural, rural, rural, style pot. And I'm now going to get other rural, rural, rural, rural, stuart style pots. And I'm going to surround the minvars with them because we are a government that's bringing in change.

18:04Why didn't you feel that you could do that in 97? Presumably there would have been a temptation to think, okay, we've won the selection. We promised we were going to stick to the tourist fiscal rules, but actually we could come in and say it's a bit of a black hole here. We need to spend some more money. So we'll just use the budget to put up taxes, put up borrowing and spend a lot more. Why did you decide not to do that in 97? I think partly because the economic situation was better. But also I think because Gordon Brown as Chancellor had a lot of other big stuff going on, bank of England independence being this, that was a massive strategic moment.

18:37And we also had stuff like the New Deal. So we were attacking the youth unemployment. We had the minimum wage being brought in. And also I think it was part of the winning strategy in opposition to say we're sticking to their spending limits for two years. Partly then to be doing all this other stuff, signaling change, real change in lots of different ways Scottish Parliament, Northern Ireland, lots going on. And then after those two years, then Gordon Brown really started to write the breaks are off the accelerators on and here we go. So it's a different approach, but I think this is, listen, as with all of this, you can go back to any budget you like and you can look at, I wish actually when we do budgets, maybe we should do this next time.

19:21One thing that would be really useful is an analysis of how all the predictions of bodies like the OBR actually pan down because the truth is none of us know. There's a line in the OBR report, the economic and fiscal out report, which says it just sort of drops in. It hasn't had any attention at all, but it says, you know, basically, if the situation in the Middle East gets any worse, we could be looking at inflation hitting 7%. Just sort of drop drops in there. Drops it in. If Trump wins and he upends the whole global trade order with this all tariff stuff, right? What impact does that have? And that's before you even think about if China got into a conflict with Taiwan.

20:00I mean, you could be driven into an enormous recession. But the smaller things too, isn't that? I mean, the OBOA is forced to accept what the government claims it's going to do. And labor and conservative governments consistently have claimed every year that they're just freezing fuel duty for a year. You'd be venting about that one on the social media, or I've spotted that. It's an amazing one, isn't it? Because the impact on the public finances is incredible. I mean, if fuel duty went up in the way that it was supposed to, cumulatively, over the last 15 years, you know, it would have brought tens of billions of pounds into the exchequer.

20:35And yet again, labor's done what the conservatives do, which say, well, we'll put it up next year. And so the OBR's forced, despite the fact they know that for the last 15 years, the government has broken that promise. They're forced to pretend. They believe what the government say. To put my card on table, I would much rather they came up with a sensible economic policy put up taxes and increased borrowing rather than feeding that their hands were so tied by their lies during the election that they couldn't actually do anything sensible. So I think in the end, this was the less a rival. What's interesting, though?

21:04And I spent a lot of time saying these guys are mad. They've tied their hands. They ruled out all these tax rises and borrowing. And now they're not going to be able to finance anything. But I'm glad, you know, they can fun stuff. And they can behave more in the way that I guess they want to behave. It's also interesting that in a way, I wonder whether there wasn't a sort of, it said something about politics or maybe there was a non -Nawink, but I didn't sense that they're going to be damaged much by it, provided the economy is doing okay in four years' time. Well, listen, it all depends on what now happens.

21:36Yeah. So if the economy grows well, they'll get a lot of credit and people say that was a very smart budget. And nobody will mind that the people saying, yeah, but they said they wouldn't do that four months earlier. Nobody will mind. If provided the economy is doing okay, nobody will mind too much. It goes to the heart of this, how long this battle will go on about who's to blame? Now, I hate the whole blame culture in politics, but this is important on this because, you know, one of the reasons why Cameron and Osborne were able to justify austerity to the public at least was because they were saying we had to do this because we inherited this terrible mess.

22:08They won that argument, even though they did it in my mind that didn't deserve to. Mrs. Stachan is exactly the same. Winter of discontent, I sorted out the country, I took on the unions. And this stuff, that's why when we talk about budgets, they get covered through all the sort of minutiae and this policy in that policy. In the end, they get remembered for the impact that we see them have over time. It all depends on that. So just a tiny one on the politics, they can go wrong in the short term. I mean, I remember when I was a member of Parliament sitting in Parliament, hearing some of the Osborne budgets.

22:42And when you heard him delivering them, you hadn't yet got this thing called the Treasury Red Book. You hadn't yet got the details and people hadn't had a chance to chew over. And in the moment, of course, the tribal sense of your party, the Laboural Conservative comes in. And if it was Osborne, he's throwing out lots of goodies. So he's like, and I'm going to jewel the A66 in Cumbria and I'm thinking, yeah, it's fantastic. And, you know, I'm going to give VAT exemption on mountain rescue, yeah, you know, terrific. And then there'll be the cheering. You'll sort of get the sense that everything is going quite well.

23:18And obviously, they all craft a story that sounds fine, right? But then with the Osborne budgets and complications, they weren't horribly wrong. Within a couple of days, they were seen as totally catastrophic, either because something like the pasty tax, a tiny thing that he will barely have noticed, will have kicked off a huge thing, or was Philip Hammond, I think, the stuff on national insurance for self -employed people that suddenly had to be reversed and a kind of massive thing because they did the numbers. But a lot of it seems to be that it's quite difficult in the moment to predict what may happen 24, 48 hours or three days later from the political immediate reaction.