Chancellor Rachel Reeves has placed a significant political wager with the 2025 Budget, crafting a package that aims to reassure financial markets and party colleagues while gambling on the UK economy outperforming expectations before the next general election.
Think Tanks Deliver Their Verdict
As is tradition, Britain's leading fiscal think tanks assembled to deliver their snap analysis of the budget decisions. The verdict from both the Institute for Fiscal Studies (IFS) and the Resolution Foundation was broadly positive, though not without substantial reservations.
The head of the IFS, Helen Miller, pointed out that Labour has broken its manifesto pledge by raising National Insurance. Meanwhile, the Resolution Foundation argued that increasing the basic rate of income tax instead of freezing personal allowances would have made the tax rise considerably fairer and more progressive.
Additional criticism emerged regarding specific measures, including the structure of the new EV tax and the mansion tax, with experts questioning why these policies didn't aim to penalise congestion or overhaul council tax entirely.
The Fiscal Cushion and Its Conditions
This year's budget received a warmer reception than last year's offering primarily because it adopted a more cautious approach to fiscal management. The chancellor has doubled the fiscal insurance policy to just over £21 billion, creating significantly more headroom against her own fiscal rules compared to the previous budget.
However, this financial cushion depends critically on two key assumptions. First, the government must maintain its commitment to constrained spending growth towards the end of the decade. Second, it needs to successfully raise all the tax revenues projected for that period.
This exposes what may be the budget's most significant vulnerability: most of the difficult measures have been deferred until 2029, the final year of the forecast period.
An Election-Year Squeeze
The timing of these deferred measures creates a substantial political problem for the government. The year 2029 represents a perfect storm - it's when the Treasury faces a significant fiscal squeeze coinciding with Britons being asked to pay more taxes.
Critically, this is also the very year Labour is scheduled to face a general election. The prospect of fighting an election campaign against a backdrop of economic contraction and rising taxes presents a formidable challenge.
Compounding this issue, despite government promises to boost living standards during this parliament, they are currently forecast to rise at the slowest rate since the 1950s, excluding the pandemic and energy price shock periods.
For now, the chancellor has succeeded in producing a budget that strengthens her position within her party and her role. Financial markets remain relatively calm, with bond yields lower than before the budget announcement, though slightly higher than yesterday's levels.
Nevertheless, this remains a complex budget with many moving parts. As with any intricate engineering project, there remains a distinct possibility that significant components may fail to function as intended. Given that many measures won't take effect for several years, it could be some time before we discover which elements succeed and which, if any, fall short.
