The Garrulous Jay – Risk-all Drag

As the weather warmed this week it was replaced by the Chancellor’s fiscal freeze. Not only were some of the most consequential measures in the Budget the result of Rachel Reeves doing nothing rather than something, but this was also accompanied by the effects of these measures being pushed back deep into the Government’s current term.

The waiting’s over… We’ve had months of media speculation and confusion, fuelled by a Treasury leakier than a rusty bucket. Accompanying this was a cameo by the Chancellor “rolling the pitch” for an income tax rise that never came: it was like she readied the nation for a fiscal football cup final, only to give us village cricket.

And this was crowned by the OBR releasing their report before Reeves had even had a chance to deliver her anticlimax. I’m trying to find alternatives for Office for Budget Responsibility, but haven’t come up with any thing better than “Out Before Ready” so far…

What all of this meant was that individuals, businesses and the markets alike could breathe a sigh of relief on Wednesday afternoon… There was little to cheer about but it could have been worse.

Much of what was delivered had already been the subject of those leaks, the Chancellor benefited from a more favourable OBR forecast than she expected even a few short weeks ago, and by contrast to last year’s infamously “one-and-done” tax-fest this was less painful.

But the devil is not so much in the detail as in the delivery, in terms of when some of the measures announced yesterday will start to bite.

The further extension of the freezing of the income tax bands out to 2031 is the most notable of these. This means the bands will have been stuck where they are for a decade when (or should that be ‘if’) they start to be indexed to inflation again.

To get a sense of the effects of this consider the OBR’s own estimates. They calculate that had the personal allowance been indexed throughout this period it would be £17,470 in 2030-31, not £12,570. Perhaps more startlingly, they project the higher rate tax threshold would have increased to approximately £70,370, rather than being stuck at £50,270.

Small wonder then that the OBR also estimates the freeze will lead to an additional 780,000 basic rate taxpayers, and 920,000 more paying higher rate tax. (Look out for the headlines when the State Pension becomes taxable in 2027!)

Quite apart from this approach being fiscally regressive, it is also politically risky because it is incremental.

This means the effects are felt cumulatively such that the pain may intensify at the very time we are approaching the next General Election. That is the big gamble on growth for Starmer and Reeves.

The Catch-22 here is that these very measures have contributed to the OBR revising down their GDP and disposable income growth forecasts. Small wonder then that the storied fund manager, Richard Buxton, called it a “Klarna Budget”.