Budget 2025

Before we look at Wednesday’s Budget, it’s worth considering how we got here. 

Our commentary on last year’s Budget included these two statements: 

So here’s the crux of the matter: the Chancellor made a very good, logical case for her proposals but only time will tell if they have been effective. 
The conclusion on reflection appears to be that the Chancellor has done nothing wrong, or illogical, but that neither has she done anything that will get to the root of the UK’s difficulties and make the real change that the incoming government was promising in July. 
In the 16 months since it came to power, the government has said a lot of sensible things but has not yet achieved much, if anything (indeed, its concrete actions tend to have counteracted its own intentions). There is, of course, a difference between opposition and government: in the former case one has only to say sensible things (or even make implausible claims), with a view to the polls and hoping to win an election; in government, saying the right thing wears thin pretty fast – the electorate is expecting results. 

It is not clear that the Labour Party as a whole understands this. There is a loud clamour for it to “tell a better story” to the people. But that, of itself, only works in opposition: comparatively few people are going to vote to re-elect a government that has made a mess of things but promises to do better next time. 

In any case, the better story being called for is one that is by and large economically illiterate: higher borrowing; higher taxes on the rich; much higher spending; etc. Again, that has a chance of working in opposition but not in power. And if the party decides to change its leadership in order to put this utopian dream into play, it will discover soon enough that to find the economy sinking fast puts voters off even more than a lack of change. 

However, that is the spectre lurking behind the Autumn 2025 Budget and a few concessions to it may explain some of the measures announced. (Of course there is another possible explanation for the economically illiterate approach – if you’re sure you’re going to lose next time around, why not put in place everything you’ve dreamed of all your life? At least you can say you did it while you had the chance and argue down the line that it would have come good given time.) 

So what did we get? In short: 

frozen income tax and NIC thresholds expended for 3 years (directly contradicting the Chancellor’s condemnation of the practice in her last Budget but also a clear case of taking all the medicine in one gulp); 
expanded borrowing “headroom”; 
removal of the two-child benefit cap; 
a miniature “mansion tax” that will be costly to administer but may play well politically to the back benches; 
new, higher, tax rates for income from property, dividends and savings; 
restrictions on use of salary sacrifice arrangements to fund pension contributions; and 
the usual, miscellaneous bits and pieces of a tax-technical nature. 
And how does that fit into the background laid out at the start of this post? Budget 2024 was all about growth, which appears to have fizzled out and been swept under the (fireproof) carpet. Budget 2025 doesn’t appear to be “about” anything (certainly not what was claimed in advance – that is, to help people with the cost of living – which was a sideline at best). The Chancellor had a stark choice between increasing taxes substantially (to avoid recurring bond market scares) and cutting spending. The latter was made politically impossible by government back-benchers, so the former was done in a go-for-broke fashion, in order to make room for additional spending on traditional Labour Party favourites. But how does that approach help the economy? Answer came there none. 

And how will it all land with the voting public? The old-fashioned choice between Conservative “prudence” and Labour “tax and spend” no longer bears on the wider consciousness, because of how the current government approached the last election. There will inevitably be questions as to whether the manifesto promises not to increase income tax or NICs have been broken but, in the end, those debates are for the political nerds. The swing voter will have looked at Budget 2024 and have thought “well it’s not exactly what I voted for but I accept that the last government left things in a mess and Labour is promising to put things in order, so I’ll give them a chance”. The pledge of a short, sharp shock, followed by growth was both prudent and promising. However, the methods chosen to implement the shock were anti-growth in effect and the government has had to come back for more. It offers no excuses this time for acting like a Labour government but whether that is what swing voters wanted (or thought they were voting for) is open to serious question.