Rachel Reeves, the UK’s chancellor of the exchequer, surprised many critics by steering her second Budget on Wednesday with some aplomb, avoiding the Scylla of left wing anger over welfare stinginess and the Charybdis of a riot by bond vigilantes at fiscal laxity.
Her decisions on the big issues — the levels of income tax, national insurance, corporation tax, VAT, the minimum wage and government spending — can be summed up as ‘steady as she goes’ or even, with a squint, as running a tight ship.
The Labour government has kept its manifesto pledges, done a little fiscal tightening, increased its headroom to stay within its fiscal targets, and can claim that it will be heading back towards balancing the budget, excluding investment, by 2030, so debt can level off as a share of GDP.
All while delivering some socially progressive wins such as lifting the hated two child benefit cap, freezing rail fares, cutting energy bills and modestly taxing high value houses.
The 10 year Gilt yield has fallen 4bp to 4.46%, about 13bp below its pre-Budget peak earlier this month. The FTSE 250 index has climbed 3.2% in the past five days.
Some of the more hawkish commentators calling for fiscal rectitude sound almost disappointed that Reeves has got away with it.
Investment blunder
But look further down the list of measures and the overall tone of wise compromise breaks down.
The Budget included a plethora of tweaks designed to raise some cash here or sharpen an incentive there. From a capital markets perspective, two in particular stand out as mistakes.
Labour are desperate to gee up the animal spirits in the economy and Reeves’s Budget speech was full of talk about growth and innovation.
The rules on tax-free individual savings accounts (ISAs) are being changed to drive more money into higher risk investments like equities and bonds — fair enough.
But Reeves’s decision to slap a 2% tax increase on personal income from investment, dividends and property rent, outside ISAs, is baffling. If the tax on cigarettes was raised by 2%, that would rightly be understood as a disincentive to smoke — the same logic applies to saving and investing.
Reeves’s argument that national insurance is not levied on these kinds of income, while it is on employment earnings, carries weight but why not end the anomaly of national insurance and simplify income taxation into one system?
Instead, she has made the rules more complicated with an extra tax band that everyone with any of these incomes will constantly be reminded of and resent.
Particularly dangerous could be the effect on rented housing. Private landlords are already under pressure from regulatory changes and high interest rates and many are giving up.
This could lower house prices at the margin but if private rented housing became less available the government would have a rent inflation problem on its hands, with few levers to deal with it. For the economy as a whole, that would be stagflationary.
The purpose of all this? To raise £1.7bn a year — a mere 0.2% of last year’s tax take.
Energy gaffe
This Budget was also one of the least green of recent years. Reeves not only introduced a charge on electric vehicles but, to cut energy bills, she is scrapping the Energy Company Obligation (Eco), effectively a levy that funded home insulation.
E3G, the climate change and markets think tank, estimated this would reduce funding for insulation from £20bn to £15bn this parliament, cost 10,000 jobs and prevent 1m families from insulating their homes in the next four years. The government would save £5bn over that time but E3G estimates energy cost savings for the whole country so far from Eco at £113bn.
Like its predecessors, the government continues to ignore the open goal of decarbonising housing — to introduce a robust national scheme to stimulate household investment in rooftop solar, heat pumps and insulation.
A system modelled on the US's Property Assessed Clean Energy loans could allow financing for such investments to be tied to the property and collected through council tax, making the loans very low risk and highly financeable through securitization.
The UK might then not lag so far behind Germany — where renewables lender Enpal is marketing its second ABS — when it comes to using capital markets to drive the green transition.