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In today’s newsletter:
All of the IEA’s budget reaction and analysis
The alternative to a wealth tax
Britain’s benefits bombshell
Andy Bernard, a fictional character in a popular TV series, once said: “I wish there was a way to know you’re in the good old days before you’ve actually left them.”
This applies to public finances as well. I’m sure that I was moaning about the tax-and-spend decisions of 2019 at the time, but in hindsight – those were the good old days, at least relatively speaking. Public spending was around 40% of GDP, the budget deficit was about 2%, and the risk premium the British government had to pay for borrowing was about in line with those of other developed economies.
Today, public spending is more than 45% of GDP (and it is hard to see what exactly we are getting in return, in terms of more or better public services), the budget deficit is more than 4%, and borrowing risk premiums are at the upper end for developed economies.
Given these large increases in public spending, borrowing and risk premiums, combined with the government’s inability to get any spending cuts past its backbenchers – the tax increases announced in this week’s budget were entirely predictable. They would have been even if nothing had been leaked in advance.
The only alternative to a tax hike would have been a major growth impulse, but the Office for Budget Responsibility is not expecting much growth for the rest of this decade, and judging from Chancellor Reeves’s budget speech, the government seems to have lost interest in growth altogether.
The budget also contained a number of smaller measures which, while not hugely important in their own right, are indicative of the political mood, namely the introduction of a quasi-mansion tax through the council tax system, and the increase in tax specifically on income from savings, assets and property. These measures do not raise much revenue, and make little economic sense: they are a political signal, not a fiscal measure as such. More precisely, they are a response to the current hype around wealth taxes – the sort of measures you would introduce if you did not believe in wealth taxes yourself, but if you tried to appease some of the people who do.
The problem with that is that socialist economic populism cannot be appeased by meeting its proponents half-way. Any attempted compromise with them will only embolden them. Thus, the main political takeaway from this budget is that this government has lost control over the economic narrative (to the extent that they ever had any), and that the likes of Zack Polanski and Gary Stevenson are now setting the agenda.
This means that those of us on the free-market liberal side of the argument need to engage in a battle of ideas on multiple fronts. We need to offer an alternative to the economic defeatism of the Starmerites, while also countering the economic populism of the socialist Left. At the IEA, we are ready for that.
Kristian Niemietz
Editorial Director
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IEA Podcast: Director of Communications Callum Price is joined by Managing Editor Daniel Freeman and Editorial Director Kristian Niemietz to review the budget and its fallout — [ [link removed] ]IEA YouTube [ [link removed] ]
Chancellor raises white flag on economic growth
Commenting on the Budget, Julian Jessop, Economics Fellow at the free market think tank the Institute of Economic Affairs, said:
“After months of damaging speculation, the Chancellor delivered yet another ‘tax and spend’ Budget, which will do little to tackle any of the UK’s deep-rooted economic problems.
“The overall package was not quite as punishing as some had feared, and the main tax increases will not kick in for several years. The Chancellor has also given herself more headroom than expected against the fiscal targets, which might make it less likely that she will have to come back for more any time soon.
“Spending will still be higher than previously planned, and taxes will rise even further. The Chancellor has broken the promise she made last year by extending the freeze on income tax thresholds for a full three years. This is the UK’s least stealthy “stealth tax”, since everybody is talking about it.
“Other key measures will target salary-sacrifice pension contributions and higher-value properties. These measures could easily backfire, discouraging savings for retirement and further gumming up the housing market. Higher taxes on dividends and landlords will also undermine incentives to invest.
“Relying on a dog’s breakfast of bitty tax increases is risky, because both the revenues and the wider economic impacts are relatively uncertain.
“There were some gestures to ‘cut the cost of living, but these measures just shifted the burden from bills to taxes, leaving households no better off. They will also lower headline inflation by just 0.4 percentage points next year, and inflation will still be higher for longer as a result of decisions made last year.”
Commenting on the Budget, Callum Price, Director of Communications at the Institute of Economic Affairs said:
“The Chancellor has raised the white flag in the battle for economic growth. Instead of putting it front and centre of her plans, taking the necessary radical action to fix our tax system and strip back public spending to a sustainable level, she has instead prioritised keeping her backbenchers onside and doing her best to avoid painful headlines. “The result is a mess of painful tax rises on working people, exactly the same people she pledged to protect, and the very people and businesses who drive economic growth.
“Where there should be a real vision and tangible plan to return economic dynamism to Britain, deliver the growth that could end our doom loop and improve the livelihoods of every Briton, we have been given yet another record high tax burden being used to support yet further swelling of the state.”
After the Budget 2025 | IEA Live , Lord Frost, Kristian Niemietz, Chris Snowdon, and Callum Price give an immediate rundown of the budget at our first live podcast, IEA YouTube [ [link removed] ]
Lord Frost: “The Government Kicked the Country in the Teeth”, Lord Frost gives his take, IEA YouTube [ [link removed] ]
News and Views
The Government’s price freeze will make our railways worse [ [link removed] ], [ [link removed] ] Editorial and Politcy Fellow Len Shackleton writes in CapX [ [link removed] ]
Energy Analyst Andy Mayer assesses the government’s changes to electric vehicle taxation in The Telegraph [ [link removed] ]
Don’t let OBR gaffe mask Labour’s own mistakes, Julian Jessop writes in CityAM [ [link removed] ]
“After months of damaging speculation, the Chancellor delivered yet another ‘tax and spend’ Budget which will do little to tackle any of the UK’s deep-rooted economic problems.”
Head of Lifestyle Economics Chris Snowdon takes apart MMT in The Spectator [ [link removed] ]
‘We are giving inflation busting pay rises to… the wealthiest demographic in the country’, Head of Media Reem Ibrahim debates pension reform on Jeremy Vine [ [link removed] ]
‘There wasn’t a single measure that would boost economic growth’, Callum Price tells Times Radio [ [link removed] ]
Britain’s £400bn benefits bombshell as 1 in 4 pounds to be swallowed by welfare, IEA analysis in The Express [ [link removed] ]
Callum Price, of the Institute of Economic Affairs, told the Daily Express: “Everyone can see that the welfare bill is already on an unsustainable path, and the Government’s surrender to their backbenches has only made it worse.“
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