Budget 2025: Oh what a tangled web

What a mess. No-one can recall a messier Budget. What was the underlying problem? I’ll tell you: they tried to be too clever by half.

We now know that Reeves knew all along she wasn’t facing a big black hole.

The OBR told her on 17 September that the downgrade in productivity forecasts was offset by tax rich growth and inflation.

Despite that, the Treasury were happy to stoke the idea that there was a huge black hole that would mean that income tax rates would have to rise.

Why did they stoke this?

Simple: they wanted, on Budget day, to be able to reveal “more-positive-than-expected numbers” and then announce that there would be no change in rates - a nice budget “rabbit”. Hurrah!

It is hard to overstate how dishonest the government were.

On 5 November, we now know that Reeves knew that the OBR were forecasting billions of headroom against the government’s fiscal rules…but she still went on TV with an unprecedented pre-budget to create the impression that big tax rises were coming because of a deterioration in the public finances.

At no point in the process did the OBR have the government missing its fiscal rules by the large margins the government were briefing journalists about. (Remember the black hole of 20 billion or even 30 billion they told journos about?)

Reeves even argued two weeks before the budget:

“It would, of course, be possible to stick with the manifesto commitments, but that would require things like deep cuts in capital spending.”

She said this, though she knew it wasn’t true - here is the balance she was looking at in successive forecasts:

Why did they announce no rate increase beforehand? At some point someone in HMT panicked that markets might react badly to this last-minute surprise, and so reversed course - which really did spook the markets.

As the former Chief Economist of the Bank of England Andy Haldane has pointed out:

“We’ve had month upon month of speculation - fiscal fandango, basically. And that’s been costly for the economy. It’s caused paralysis among business and consumers. It’s the single biggest reason why growth has flatlined, it’s been grounded in the second half of the year”

What the Budget really does is not plug an imaginary black hole - but increase spending (mainly on welfare) and increase tax.

In 2028/29 you have:

• £5.5 bn forecast deterioration

• £11.3 bn more spending

• £26.1 bn tax increase

And the spending figures are actually worse than they look, because of two further attempts to be too clever by half.

Fiscal fantasy football

Lying about how bad the forecast was is only one way the government has tried to be too clever by half.

To increase the headroom on her fiscal rules Reeves has done two things.

First, she has said that £6 billion of spending pressures on Special Educational Needs (SEND) will be “absorbed” by departments from 2028/29 on - i.e. the Department for Education.

As the OBR noted, no offsetting savings have been identified

The OBR note that:

If it were fully funded within the Department for Education’s £69 billion RDEL core schools budget in 2028-29, this would imply a 4.9 per cent real fall in mainstream school spending per pupil rather than the 0.5 per cent real increase planned by Government.

Bridget Phillipson has so far said three contradictory things about this.

• First the Guardian reported that Phillipson has told Labour MPs that the cost won’t be met by DFE but elsewhere in government. This simply raises the question - where is it coming from then?

• The Guardian also report that DFE are saying that “changes to the system would substantially bring down the growth of the Send budget”. But DFE are wary of telling Labour MPs this - they are on the edge of a welfare-style revolt against these potentially-controversial reforms already.

• On the media Phillipson claimed that this is an issue for the “next spending review.” But the £6bn hit is in 28/29. That’s firmly in this spending review and her budget for that year is already set (£109.2bn across early years, schools, FE and HE)

So that’s a mess.

The other thing Reeves has done to flatter the numbers is to reopen the spending review to and announce £1.4 billion of (completely unspecified) cuts, and then £4 billion and £4.9 billion of unallocated savings in the two years after the next election. Funny that.

As the OBR note

In 2028-29, the final year of the Spending Review, the government has reduced RDEL by £1.1 billion, more than explained by a £1.4 billion reduction to the overall envelope which has been allocated across non-NHS departments

After the end of the current Spending Review period in 2028-29, as is usual there are no departmental spending allocations and instead the Government sets an overall assumption for total RDEL spending. In the Budget, the Government has stated that it intends to reduce total RDEL spending that will be allocated to departments by £4.0 billion in 2029-30 and £4.9 billion (a 0.8 per cent reduction in the RDEL envelope) in 2030-31 compared to the assumption set at Spring Statement 2025.

Apart from anything else, this further dents Bridget' Phillipson’s claim that the Treasury or other departments are going to suck up her £6 billion bill. Not only are they not going to do that, there are another £1.4 billion of unexpected savings which some unknown departments (potentially including DFE) are going to have to find.

Slow hand clap

The two big moves in this budget were to:

• increase income tax: in a way that Rachel Reeves said last year would “would hurt working people” and breach her manifesto promise

• …in order to fund benefit spending: caused by the government’s defeat on welfare reform and decision to end the two child cap (which the government previously said was unaffordable).

The OBR note that:

Relative to the March 2025 forecast, welfare spending is expected to be higher across the forecast with the difference reaching £16 billion by 2029-30.

as a result of “higher benefit uprating… higher unemployment… higher disability caseloads and average awards… higher pensioner awards and caseloads [and] policy measures”. Only 1.7 billion of this is the Winter Fuel u-turn.

You’re only making it worse

In the end, the whole attempt to bait-and-switch and try and manage expectations to expect an income tax rate rise didn’t work.

People like the IFS still pointed out that the government had broken its promise not to increase national insurance and income taxes. Polls show that people thought the budget was unfair, and would make them worse off.

Labour’s manifesto said they would increase spending by £9.5 billion a year by 2028/29.

But spending is now forecast to be £179 billion a year higher in 2028/29 than the forecast Reeves inherited. In other words, she’s increased spending 18 times more than she said she would. That is why your taxes are going up.

The price is of dishonesty is really dumb tax rises. Raising thresholds in real terms is a regressive way to raise tax - compared to raising rates, people on lower incomes pay more. More than 1.7 million workers will be dragged into either paying tax for the first time or pushed into a higher band.

As the Resolution Foundation have pointed out, a 1p tax rise would have raised the same amount of money but been less costly than freezing thresholds for anyone with an income below £35,000, and all but the top 10% of the income distribution are worse off because of opting for threshold freezes over rate rises.

That makes it a surprising policy for a notionally social democratic government.

But it is only doubling down on what Reeves did in April, cutting national insurance thresholds. The government wanted to spin that was only paid by employers.

But the OBR said 76% is passed through into lower wages. So someone on £13k loses £500. Someone on £9K loses 5% of their income.

So for the second time in a row, a government that came to power promising not to increase tax on working people has increased tax in a way that is actually targeted on low income working people.

They have done this not because they think it is a good policy, but because they think they can fool people that they aren’t breaking their promises.

But as the polls show, no-one is fooled. What a mess.