A Summer of discontent?

Forget piles of bin bags and rats in Birmingham. The Government is facing a Summer of discontent, with a worse Autumn very much on the cards.

Let’s face it, Labour MPs didn’t get elected to cut benefits. It’s a Rubicon they would do almost anything not to cross.

Chancellor Rachel Reeves said the last Budget was a ‘once in a Parliament event’ that would fix the foundations of the economy and promised she wouldn’t be coming back with more taxes. But low growth, higher debt servicing and lower than expected tax receipts left the Chancellor no option but to cut spending to meet her iron clad rules.

Is this a return to austerity, which the Chancellor also promised would not happen? No – certainly not yet. The October Budget set out big real term increases in spending. Last week’s measures mean spending increases in future years will reduce by 0.1%. Unprotected departments will, though, feel pain and are reported to be modelling cuts of between 6-11%.

Overall, the Office for Budget Responsibility (OBR) confirmed the Chancellor’s fiscal headroom had been wiped out. Receipts from taxes were £7.5 billion less than expected. Higher borrowing costs means around £5 billion more is be needed to service our national debt, taking our annual interest payments to £110 billion.

Reeves was forced to announce around £14 billion of savings to get her headroom back to the wafer thin £10 billion it was at the end of the last Budget. A £10 billion buffer might sound like a lot, but against the Government’s £1.2 trillion budget it is tiny and – given the experience of the last few months and where things are heading globally – perhaps far from prudent.

Next year’s growth forecast was halved to just 1%, while growth in three years’ time is expected to be just 0.3% higher than previously forecast. It’s worth remembering that OBR growth forecasts have been criticised as being consistently optimistic.

The birds might be singing and we might be in meteorological Spring, but vigorous green shoots of growth are still stubbornly absent in our economy.

Was the Chancellor right to focus on reducing welfare and other public spending? Many in the Labour party, including MPs, will be asking ‘why not tax the rich?’ With the Conservatives trying to label her statement an emergency Budget, and with her previous commitments not to ‘come back for more’, politically she had little choice but to avoid announcing more tax rises last week.

In any event, the tax burden will hit a record high next year. Around 60% of income tax (the largest source of revenue for Government) comes from the top 10% of earners. The top 1% account for 30% of the tax take. The Treasury is very alive to the fact that rich people leaving the country could cause a big drop in receipts.

When you look at the numbers spending on welfare does look unsustainable. More than a fifth of working-age adults are not in work or actively looking for work. The Department for Work and Pensions (DWP) predicts that by 2030 some 3.6 million people will be economically inactive – up 61% since before Covid.

The number of young people not working due to mental health issues has doubled over the last decade, with nearly a million now affected. Over the last four years, spending on working-age health-related benefits has risen by a third.

Even after the Spring Statement, the welfare bill is still set to rise from £313 billion this year to £373.4 billion in 2029, an increase of over 19%. But over £30 billion of that increase is down to pensions – £15 billion relates to health and disability payments to working age adults.

There will surely come a point when the pension triple lock comes under serious question. Should pensioners benefit from rising wages when inflation is what’s most relevant?

The problem for the Government is that restricting the growth of welfare benefits means people will inevitably be affected, causing serious difficulty for Labour MPs. The Government’s own analysis shows that 250,000 people – including 50,000 children – will be pushed into relative poverty because of the Chancellor’s decisions. It forecasts that by 2029-30, 3.2 million families will suffer an average financial loss of £1,720 a year.

The Chancellor argues that fewer people will end up in poverty once the effects of her back-to-work drive are included. But even if they’re inclined to support her, Labour MPs will find it very difficult to defend these measures.

The Chancellor’s restored headroom, such as it is, could be easily wiped out by US action on tariffs or other events, whether they are directed at the UK or not. The OBR says you may as well flip a coin as to whether more taxes or spending cuts will be needed in the autumn.

I suspect the chances of another difficult Budget will be higher than that and following a Summer of discontent over the welfare cuts, new wealth taxes, changes to capital gains tax and the pensions triple lock could well become serious targets for change.