Ross Clark

Six days on from the Budget, and things don’t look any better for Rachel Reeves’s claim that her Budget won’t negatively affect working people. Today and tomorrow, it is the turn of the Commons Treasury Select Committee to pick through the wreckage. What have we learned so far? David Miles from the Office for Budget Responsibility (OBR) doubled down on the effect of the rise in employers’ National Insurance (NI). The OBR has already estimated that three-quarters of the effect will be on wages – thereby contradicting Reeves’s claim that working people will not suffer from the rise. Miles went further, saying that many economists would argue that 100 per cent of the effect of higher employers’ NI will eventually be borne by employees.

It was the absence of the Office for Budget Responsibility’s judgment that was blamed for the bond market crisis after Liz Truss’s mini-Budget. Truss and her chancellor Kwasi Kwarteng had rushed to enact their vision for a fast-growing economy without waiting for the wisdom of the government’s official fiscal watchdog. For Truss, the OBR is just another part of the establishment that was out to get her. But then, can the OBR be entirely trusted anyway? It seems that it has created a black hole of its own making – by overstating Public Sector Net Financial Liabilities (PSNFL). PSNFL is the measure that Rachel Reeves has chosen to use for her new fiscal rules – preferring it to the measure previously used because it flatters, slightly, the government’s balance sheet.

It has been a good day for investors in the Alternative Investment Market (Aim), with the index of the top 100 Aim shares up 4.3 per cent. But that merely serves to undermine the damage that Rachel Reeves had done to the market by previously suggesting that she might remove the exemption whereby Aim shares were free of inheritance tax (IHT). In the event, she made Aim shares liable for 50 per cent of the normal rate of IHT – hence the relief rally. Yet Aim shares are still down 2 per cent since election day. By contrast, the Ftse small cap index – smaller shares within the main London market – is up 2 per cent over the same period. The Ftse 100 did not have such a good day, down 0.7 per cent.

Could Rachel Reeves’s ‘black hole’ be filled not through tax rises or even spending cuts but rather through getting an extra two million people into work? That is the claim this morning made by the Jobs Foundation, a think tank set up by Matthew Elliott, now Lord Elliott, who formerly ran the Taxpayers’ Alliance. Raising the employment rate from 75 per cent to 80 per cent of the working age population, it claims, would raise an extra £20 billion in tax. That is not quite the £35 billion to £40 billion worth of tax rises which we have been briefed to expect in Wednesday’s Budget, but never mind – all those extra jobs would be a huge contribution to the public purse. How do you create those jobs and, equally importantly, persuade British people to fill them?

Remember Gordon Brown’s ‘golden rule’ – that over the course of the economic cycle the only net borrowing he would allow was to fund investment? As for current spending, he told us, he would pay down debt in the good times so that he could borrow in the bad. It sounded reassuring, until Brown started to fiddle with the figures in every conceivable way. He shunted debt off the public balance sheet via private finance initiatives.  Is anyone confident that Reeves really will invest her extra £20 billion a year in such a way that it will earn the taxpayer a return? He kept stretching out his idea of the economic cycle, so it seemed that we would never get to the end of it, obviating the need ever to balance the books.

Could Rachel Reeves really be so brazen as to lumber private sector employers with having to pay national insurance contributions (NICs) on their employees’ pension contributions – but to spare public sector employers the same burden? That is what is being reported this morning. It has been suggested that, in next week's Budget, the Chancellor will announce the end of an exemption for private sector employers, which currently ensures employers don’t pay NICs on pension contributions. At the same time, Reeves is proposing to instantly compensate public sector bodies so they are effectively spared from have to bear the burden. This would be crass for two reasons. Firstly it would be a clear breach of Labour’s manifesto promise not to raise NICs (as well as income tax and VAT).

There is a big danger in today’s government borrowing figures for September being a little less bad than was expected by many observers. It will lead to claims that the Chancellor has enjoyed a ‘windfall’ prior to next week’s Budget, therefore lessening the need for spending cuts. No, there is no windfall. Until recent years, the idea that the government would have to borrow £16.6 billion in a single month would have been received with horror. True, September is not generally a great month for government finances, and the level of borrowing in the year to September – at £79.6 billion – is only around half the size of the deficit Gordon Brown bequeathed the country with when he left office in 2010.

If the public is worried about what lies in store in Rachel Reeves’ first Budget, there are few signs of it yet in their shopping habits. The latest retail sales figures, released by the Office for National Statistics this morning, show that sales volumes were up by 0.3 per cent in September. Over the three months to September – a more reliable figure as it is based on a lot more data – sales were up a very strong 1.9 per cent. It seems that the long covid winter in the retail world may finally be coming to an end: though sales volumes in September were still 0.2 per cent down on the level they were in February 2020, on the eve of the pandemic.

The tragedy of the coming Budget is that it could have been a great reforming Budget. Instead, it now looks like being an extremely messy one, with the Chancellor buffeted by political winds into coming up with tax changes which are bizarre, punitive and which end up pleasing no-one. The latest symptom of this is the suggestion, reported in the Times today, that Rachel Reeves may increase capital gains tax on shares but not on property. Why should you pay more tax when you sell your shares than when you sell an investment property? Reeves was right the first time, when she hinted that she was going to equalise capital gains tax with income tax.