A Big Budget – but not a Reforming Budget
blog | Words Matthew Horne | 11 Nov 2024
Innovation Unit’s Response to the Government’s Budget
The first budget following a change in government is a significant moment. It has only happened 4 times in my lifetime: 2024, 2010, 1997, and 1979. Conventionally, it is the moment in the political cycle for a government to do unpopular things like cut spending or raise taxes, because it provides sufficient time before the next election for either the pain to be forgotten or the benefits to be realised. So what happened this time – and what does it mean for the challenges facing our society?
At Innovation Unit, we want to see everyone in the UK, belonging and contributing to a thriving society. However, currently as a country we see 5 really big long term challenges:
- A climate and biodiversity crisis
- An ageing population requiring fit for purpose pension and healthcare systems
- High levels of poverty and inequality
- Low growth and economic productivity
- Conflict and instability around the world
We believe that meeting all of these challenges together requires much greater alignment between private business, the voluntary and community sector and the public sector. And we believe this needs to be coupled with much greater financial investment by all three in meeting these challenges. And for the public sector to play its part, like it or not, that now necessarily means higher spending, higher borrowing and yes higher taxes.
Therefore, we welcome at long last, a dose of honesty from politicians brave enough to say that in order for the public sector to play its part in meeting the many challenges that the UK faces, taxes and borrowing will have to increase now and for the long term.
There is a saying: ‘you can’t have European standards of public services and social welfare, funded by US levels of taxation’. In the UK, after 15 years of austerity and anaemic growth we are close to US standards of public services and social welfare, funded by European levels of taxation. Something has to change.
Bold tax reform?
In our article in June we made the case that bold reform of public services required bold reform of our tax system in order to fund them. As well as suggesting examples of taxes that should be abolished (e.g. council and inheritance tax), and taxes that should be introduced (e.g. land value and carbon taxes), we proffered 4 simple principles for tax reform:
- Make taxes fairer
- Make taxes simpler
- Make taxes incentivise productivity
- Make taxes greener
Did Rachel Reeves’ listen?
A big budget – but not a reforming budget
Not quite. What she has given us, is the largest tax raising budget in modern times. It takes taxes to over 38% of GDP, which is historically high for the UK, but comparatively modest for most European countries. The budget also provided big increases in government borrowing, intended to pay for capital investment, rather than day to day spending on public services.
This increases significantly the amount of money available to spend on investment in national infrastructure such as energy, transport, housing, water etc, as well as capital investment in education and health. Government spending is forecast to rise to 44% of GDP which is historically high for the UK, but again about average for a European country
This is significant and politically brave, but there are otherwise few signals of bold reform to our tax system: No indication of reform to council tax, no hint of abolition of stamp duty, no sign of merging income tax and national insurance.
This is a budget designed to ‘scrape as much revenue’ from the existing tax system as possible without breaking the election promises to not raise taxes on working people. These promises may have been politically expedient during an election, but ultimately limits the ability of the government to fund and deliver meaningful change.
Most of the tax increases in the budget affect relatively few people, such as capital gains tax, inheritance tax, stamp duty, abolition of non-dom status, VAT on private school fees, etc. and they raise relatively small amounts of money.
However, the largest tax increases come from increases in employer National Insurance, affecting almost everyone in paid work and the organisations who pay them. While this extra revenue is welcome, we share the serious concerns of NCVO and ACEVO about the ability of charities, many of them vital service providers themselves, to shoulder these increased costs. Most economists agree it would have been preferable to put up income tax instead.
Innovation is still needed
This was a big budget, but not a great reforming budget. This was a budget designed to fix and repair the many messes that the government has inherited: in the NHS, prisons, further education, local government, housing. However, we hope that future budgets will be bolder and more innovative in their reforms, and unleash a wave of innovation and growth in our economy, and an equally powerful wave of innovation, productivity and reform in our public services. Only then can we meet the long term challenges facing the UK head on, and really begin to grow that thriving society.
Read more about what we think the new government should prioritise in our open letters to the Secretaries of State for