My Lords, it is a privilege to open this Budget debate in your Lordships’ House, and to speak alongside so many distinguished and expert noble Lords. I look forward to listening to, and learning from, all the contributions today. We should perhaps spare a thought for the noble Lord, Lord Bridges of Headley, who, as speaker number 72, has to try to find something new to say. I do not doubt that he will succeed.
I take this opportunity to welcome the right reverend Prelate the Bishop of Portsmouth to your Lordships’ House. I very much look forward to his maiden speech.
Undeniably, this Budget has been dominated, even more than usual, by questions of process before, during and after it was delivered. There were months of speculation in advance. On the day of the Budget itself, the OBR made the serious error of releasing significant details before it was delivered and, shortly after the Budget, the OBR made the decision to publish the timeline of its forecasts. The OBR was clear in its evidence to the Treasury Select Committee this week that the Chancellor did not mislead, but I am sure that many noble Lords may, perfectly fairly, choose to focus on these questions today. In opening this debate, though, I will focus on the measures contained in this Budget and set them in the context of our wider strategy to build a stronger and more secure economy.
As noble Lords will know, we inherited an economy with serious flaws—with a crisis in our public services, a crisis in our public finances and a crisis in the cost of living. At the heart of this deep malaise had been a chronic lack of investment, both public and private, weighing down on growth and productivity. Private sector investment was the lowest in the G7, constrained by years of economic instability, a planning system that thwarted projects before they even began, a regulatory system tying businesses in red tape and a Brexit deal that cut Britain off from our largest market.
Public sector investment was no better and was even set to fall again, from 2.5% to 1.7% of GDP. That meant vital infrastructure projects constantly deferred, delayed or cancelled—roads, railways and energy projects that did not get built. Little wonder the IMF repeatedly warned that a lack of investment posed a major barrier to growth.
That is why, since day one in government, we have put increased investment at the heart of our growth strategy and made growth our number one priority. In our first Budget, last year, we changed the fiscal rules to enable and protect £120 billion of additional capital investment—the highest level in four decades—in housing, energy and transport: the infrastructure that Britain needs to grow. We have systematically begun to remove the barriers to investment faced by the private sector, with the biggest planning reforms in a generation; cutting the cost of regulation; investing in skills and apprenticeships, while reforming our visa system to attract the best global talent to Britain; pensions reform to release more capital for investment; and resetting our relationship with the EU.
My Lords, I also welcome the right reverend Prelate the Bishop of Portsmouth and look forward to his maiden speech and working constructively with him in the months and years ahead.
We have all had a few days to consider last week’s Budget, and the conclusion that the vast majority of commentators have reached is, unfortunately for our country, decidedly negative. The one welcome and significant aspect is the slight increase in fiscal headroom from its low level last year, but this has been clouded over by the flow of misinformation in the run-up to the Budget. The negative aspects are numerous. I turn first to the most disappointing area.
When Labour took power, they constantly assured us that growth was their number one priority. Less than 18 months later, growth as an objective has virtually disappeared. There are few pro-growth measures in the Budget but many that will hinder growth, and there were scant mentions of the subject in the Chancellor’s speech. It seemed that growth had served its political purpose and could be cast aside. The Prime Minister tried to correct this on Monday in an unusual post-Budget speech, but he did not dispel fears that growth would become less of a priority. Since then, the OECD has warned that growth will be sluggish and that UK inflation will remain the highest of the G7 countries this year.
The Minister has said today, in an attempt to talk more about growth, that there is clearly much more to do on growth, and I agree. For growth, we need business and consumer confidence, both private and public investment, a tax system with the right incentives and supply side reforms to lift the burden of regulation. The Prime Minister is promising the latter, but the Government’s actions do not match the rhetoric.
I turn next to the extraordinary pre-Budget shenanigans, which lasted many weeks. Before the Budget was delivered, vast swathes of it, indeed pretty much all of it, were trailed, briefed out, withdrawn and then re-briefed by the Government themselves. What purpose all this activity was meant to serve is mysterious. What is clear is that the whole process, counter to all norms and indeed the rules, was contrary to the national interest. As one illustration, Andy Haldane, the former chief economist of the Bank of England, was explicit in saying:
My Lords, like the first two speakers, I look forward to the maiden speech of the right reverend Prelate the Bishop of Portsmouth.
The purpose of this debate is to debate the Budget. We dealt with the omnishambles of the Budget process in the debate on the Statement on Monday. Unlike the Minister, I hope that every Tory speaker is not going to repeat what was said then. Dare I say, we will otherwise assume that their repeated and offensive personal attacks on the Chancellor are only to deflect attention from their mismanagement of the economy in recent years.
There is enough to criticise in the detail of the Budget, although not all of it. We on these Benches are happy with the removal of the two-child cap, the most immediate step that could be taken to reduce child poverty. We welcome the proposals for energy price reduction, even if they do not go quite far enough, and we are glad that the Chancellor has finally listened to the calls of my noble friend Lord Foster and others to tax the big online gambling companies.
The Chancellor says that the Budget is about making choices. We agree, but we think that she has made the wrong choices. Freezing tax allowances, as referred to by the Minister, is deeply unfair to struggling families. Taxing the huge windfall profits of the large banks would have been preferable, but I think the Chancellor did not want to do that because she wanted them to announce investments, which they have subsequently done. For struggling high streets and small business, the Budget brought little hope. Our calls for an emergency VAT cut for the hospitality sector have been ignored. The Budget is silent on the ticking time bomb of social care. We need an urgent cross-party plan to fix it, as without one the National Health Service will never truly recover.
The elephant in the room is our relationship with the European Union. Noble Lords would expect us to say that from these Benches. The respected US National Bureau of Economic Research has concluded that, by 2025, Brexit had reduced UK GDP by 6% to 8%. Investment was reduced by 12% to 18%, employment by 3% to 4% and productivity by 3% to 4%. It said that the original adjustment calculation of 4% estimated by the OBR was true for the first five years but underestimated output over a decade.
My Lords, from my perspective, the Budget has been received about as well as could have been expected in the circumstances. It also seems to have satisfied the bond markets and the Government’s own Back-Benchers, which is no small feat. It has been clear for months that the background was going to be challenging, given the slow growth evident across the industrial world, and this has left us with a tax base that is not sufficient to fund planned government spending. This has been the pattern for some time.
The Government’s own actions have not helped, of course. The promise not to increase the three main tax rates was never convincing, nor was setting fiscal rules that did not provide sufficient room for manoeuvre relative to the likely scale of forecasting errors. This encouraged speculation and made the interaction with the Office for Budget Responsibility even more sensitive than usual. Flying so many tax-raising kites, and the indecision over whether income tax rates should be increased, did not help either. However, for me, the big question is whether the action taken in the Budget is enough to give us a calmer position for the future, and whether the Government can avoid the same damaging speculation before future Budgets. The Budget margin for the future is considerably larger than that set last year, and that, for me, is very welcome. The OBR gives the headroom a reasonable chance of seeing us through the next year. However, I am less sure about subsequent years, when the margin of error around forecasts is inevitably much larger and often underestimated.
There are other potential problems. I would have preferred to see income tax rates increased now; freezing allowances may be less visible, but it still bites. That comes into effect only in the later years of this Parliament and will disproportionately affect those earning under £35,000 a year.
There has also been much discussion about the fact that taxes have been running ahead of expectations, suggesting that activity has somehow or other been “tax rich”. However, I would be cautious about this. In my own experience in the Treasury, periods of surprising tax buoyancy were often followed by experiences that meant that was not sustained. The bigger challenge is that debt is not coming down decisively, either absolutely or as a percentage of GDP. In no year of the forecast is it below the ratio for 2024-25. The best that can be said is that it is essentially flat. Around 9% to 10% of total government revenues will continue to be spent on debt interest.
I thank the Minister for his opening speech in this debate on the Budget. In this maiden speech, I want to thank all noble Lords for their warm welcome to the House, and to thank the doorkeepers and parliamentary staff for their unfailing kindness, good humour and patience with lost Bishops, and for the support they gave in the run-up to my introduction in late October.
As Bishop of Portsmouth, I lead a vibrant, confident community of communities. The Anglican diocese of Portsmouth lives from a generous, grounded and corrigible faith, a commitment to collaboration and partnership, and a vision of the common good which includes everyone. Wonderfully, in my view, the motto for the city of Portsmouth is “Heaven’s Light Our Guide”.
Working in partnership with neighbours within the wider Christian community, and with the faith communities and voluntary and statutory sectors, the communities I lead are resolved to serve the people, neighbourhoods and communities of East Hampshire, the city of Portsmouth and the Isle of Wight, to find what is good and to strengthen it, and to work with others for the flourishing of everyone.
I also bring to this House a commitment to the flourishing of children and young people in our nation. I chair the governing body of the National Society for Education, established by royal charter over 200 years ago. Today, the society is a long-standing partner in educational delivery, working with successive Governments and serving the work of nearly 5,000 schools and 900 academies, and educating nearly 1 million children and young people. It is engaged at every level of the education system—from early years to higher education—to inspire a generation of new school and academy leaders, and to work with successive Governments in shaping policy.
In responding to the Budget Statement from His Majesty’s Government, there are two particular areas I want to highlight, with a couple of questions to conclude.
My Lords, it is a privilege to follow the right reverend Prelate’s inspiring maiden speech. He is a Bishop far from lost who has already found his feet, I would say. In the absence of my noble friend Lord West of Spithead, it would be remiss of me not to start by mentioning the right reverend Prelate’s affinity with the Navy. Portsmouth is also, as he said, marked by considerable area inequalities and poverty, to which he referred so movingly. They are very much on the Government’s agenda.
As his speech reflected, the right reverend Prelate brings to your Lordships’ House a passion for education, children and young people’s opportunities, the environment and tackling intergenerational unfairness: all issues that resonate so strongly with our work in this House. I look forward very much to his future contributions. They are, as he made clear, also important issues for the annual Budget, to which I now turn.
I, and I know others, shed tears of joy at the announcement that what was dubbed the “worst social policy ever” by an eminent social policy scholar is finally to be abolished. The end of the two-child limit means that not only will 450,000 fewer children be in poverty by the end of this Parliament, but the depth of poverty will be reduced for many. One mother responded:
“Finally, all my children will be seen as equals”.
To those who have reacted hysterically and in language that denigrates thousands of parents, calling it a “Budget for Benefits Street”, paid for by striving working people, I remind them that three-fifths of affected families have a parent in work, with an estimated 70% of the additional spending going to this group, and that raising children on an inadequate income is itself hard work.
I ask them, are they really happy to countenance hundreds of thousands of children suffering desperate poverty, testified to by charities and academic research, because of an ideological belief that punishes children? Are they oblivious to the costs of this poverty, not just to children whose childhoods and futures are blighted, but to the wider society and economy? Are they aware of the depth of public concern about child poverty? Polling by Public First found that this concern meant that, when provided with information about the cost-effectiveness of abolishing the limit in reducing child poverty, support for doing so soared.
My Lords, I congratulate the right reverend Prelate the Bishop of Portsmouth on his engaging and humorous maiden speech, which combined passion with making some very serious points. We look forward very much to working with him, and to his future contributions.
On taking office, the Prime Minister said that he wanted to put country before party. He actually said on the day he went into Downing Street that he wanted to govern for those who did not vote for him, as well as those who did. There was little sign of that in this Budget. This was a political Budget: a Labour Budget for Labour Back-Benchers.
The Government continue to blame everyone but themselves for any problems. No one believes them any longer. The Prime Minister talks about international headwinds, as though the previous Government had not faced massively bigger international headwinds, with both the financial crisis—its consequences, which went on—and Covid. Covid inevitably inflated borrowing, pushing it up to 14.7% of GDP. But, thanks to the efforts of the Government, by the time of the election it was back to 4.2%. This was no unknown black hole. As Paul Johnson of the IFS said, not so much an unknown black hole, more a known grey hole. If there was a black hole, it made no sense for the Government to have gone on a spending spree as they did in the Budget last year.
The Government, furthermore, stand accused of selective leaking of confidential information in order to support this false narrative. We shall see and people will decide for themselves but, whatever the result, it is time for the Government to face up to the consequences of their own policies. It is time to abandon the Alastair Campbell playbook.
A key mistake last year was not to allow a realistic degree of headroom against the fiscal rules. This compounded the very late Budget date. Inevitably, it put the Government on the hamster treadmill, with unprecedented speculation and uncertainty. As the noble Baroness, Lady Neville-Rolfe, pointed out, Andy Haldane, the former chief economist at the Bank of England, said that this was the reason why the economy had flatlined, because it hit confidence, profits and the property market.
My Lords, it is a pleasure to follow the noble Lord, Lord Lamont, as always, and I welcome the right reverend Prelate the Bishop of Portsmouth. I welcome the main proposals of this Budget: some as important measures to combat inequality and support households; others as necessary responses to what remains a very difficult time for the British economy.
As a social democrat, I applaud the Budget’s wide-ranging package of cost of living measures, including the reduction in energy bills, the minimum wage increase, and the freezing of prescription charges and rail fares, alongside the pre-announced expansion of free childcare for working families. This was the most important issue for millions who supported Labour at last year’s election, and the Government are delivering on those concerns.
I welcome the ending of the two-child benefit cap—the single biggest policy driver of child poverty in Britain. I have been disheartened to hear Conservative and Reform voices in the past week caricature this move, which primarily benefits children in working families, as paying for welfare. Children who grow up in poverty are significantly more likely to rely on benefits in their adult life. If you support work and oppose dependency, you should support the end of the two-child cap, not denigrate it.
I also strongly welcome the increase in the minimum wage. The Government already have a proud record on wage inequality. Wages are up more in the first year of the new Government than in the first decade under the last Conservative Government. In 2015, 20% of all employees were low paid—that is, earning less than two-thirds of the median wage. That figure today is 2.5%.
The Chancellor’s commitment to an expanded headroom on her fiscal rules is also welcome. I hope it will give the Government more space to consider big decisions based on their merits rather than operating on the cliff edge of fiscal rules and living in fear of events that cause small changes in fiscal parameters or bond market reactions.
20 of 157 shown
All this and more is why, since the election, we have seen an additional £250 billion of private investment committed to the UK. It is why, in this Budget, the OBR upgraded Britain’s growth forecast for this year, from 1% to 1.5%. It is why we were the fastest-growing economy in the G7 for the first half of this year and are on course to be the second fastest for the year as a whole, and it is why, just this week, the OECD upgraded its prediction for Britain’s growth next year. But there is, clearly, much more to do.
Ahead of this Budget, the OBR looked back at the productivity performance of the previous decade and concluded that the chronically low levels of investment, together with the effects of Brexit and the pandemic, have weakened the economy by far more even than previously thought. This reappraisal of the productivity performance of the past has directly impacted its view of GDP going forward, driving lower growth forecasts for the remainder of the forecast period. The OBR has been clear that its review reflects not what this Government have done over the past 14 months but the legacy of the past 14 years. Nevertheless, it now falls to us to deal with the consequences.
This Budget continues that work, by taking three deliberate pro-growth choices. First, by choosing to maintain economic stability, getting inflation and interest rates down, we are giving businesses the confidence to invest and our economy the room to grow. Secondly, by choosing to reject austerity, we are protecting £120 billion of additional investment in growth-driving infrastructure. Thirdly, by choosing to back the fast-growing companies of the future, we are supporting the investment, innovation and economic dynamism that will increase growth in the next decade and beyond. Let me take each in turn.
The first pro-growth choice made by this Budget was to maintain economic stability. In the months leading up to the Budget, in countless conversations with business and investors, I heard repeatedly that the most important action the Government could take would be to reduce inflation, helping interest rates—already cut five times since the election—to continue to fall. A growing economy needs strong foundations of economic stability, with borrowing down, inflation down and investment up. So, because of this Budget, borrowing will fall as a share of GDP in every year of the forecast: from 4.5% in 2025-26 to 1.9% in 2030-31. Borrowing will fall more than in any other G7 economy. Net financial debt will be lower at the end of the forecast than it is today and the headroom against our stability rule will more than double to £21.7 billion.
The Budget also took more direct action to cut inflation. We have taken £150 off energy bills, frozen rail fares for the first time in 30 years and extended the freeze on fuel duty. All these things together take 0.4% off inflation next year. To put that in context, it is the biggest near-term reduction in inflation due to government policy ever forecast by the OBR at a single fiscal event.
The second pro-growth choice the Budget made was to protect the £120 billion of additional capital investment that we have committed over the next five years, ruling out a return to the austerity of the past. The OBR has estimated the eventual long-term growth impact of this increase in capital investment as adding 1.4% to GDP. Cutting this and returning to austerity would be the worst thing we could do for growth—the very definition of short-termism. Yet that is precisely what previous Chancellors, with previous fiscal rules, have done.
In the years following the financial crisis, austerity took demand out of the economy when it was needed most, undermining investment in critical infrastructure, weakening productivity and choking off growth. Unlike today’s Conservative Party, we will not repeat the mistakes of the past: the exact mistakes that led to the productivity downgrade that we must now fix. Instead, our increased investment will deliver new roads, improved transport, new homes and new energy infrastructure. We are investing in the construction of Sizewell C. We are investing in the UK’s first small modular reactors at Wylfa and in the Lower Thames Crossing, the trans-Pennine route upgrade and Northern Powerhouse Rail.
The third pro-growth choice this Budget makes is to back the fastest-growing British companies of the future. The ScaleUp Institute described it as
“a budget for scaleups and those ambitious to scale”,
and it is right. The UK is a great place to start a business, but I have heard for too many years that our companies cannot scale at the same rate as their US peers. As a result, brilliant British businesses are either acquired, choose to go abroad to raise investment, or fail. We will change that. We will make the UK the best place to start, scale and stay, because we know that today’s fast-growing firms are tomorrow’s engine of jobs and growth.
By doubling the eligibility of our enterprise tax incentives, investing billions of pounds in research and development, and delivering reforms to boost the attractiveness of UK markets, we will ensure that these companies can access the capital and talent they need to succeed. For all businesses, large and small, we are maintaining the lowest headline corporation tax in the G7 and the most generous full plant and machinery capital allowances in the OECD. To incentivise private investment and encourage growth, we are also introducing a new 40% permanent first-year allowance for main-rate plant and machinery from July 2026.
In this Budget, we faced a choice: we could have made the reckless choice to abandon our fiscal rules and let borrowing and debt increase. Instead, we made the pro-growth choice to get borrowing, debt and inflation down, more than doubling our headroom. We could have made the irresponsible choice and returned to austerity, cutting public services and undermining capital investment. Instead, we made the pro-growth choice to protect the investment in Britain’s infrastructure to build a stronger, more secure economy, but these choices need to be paid for.
The previous Government froze personal tax thresholds from 2021 until 2028. This Budget maintains all income tax and equivalent national insurance thresholds at their current level for a further three years from 2028. I accept that maintaining these thresholds is a decision that will affect working people—the Chancellor said that last year; I said that last year, and I will not pretend otherwise now—but we have sought to keep their contribution as low as possible by making other fair and necessary reforms to the tax system.
A Blackpool terrace pays more council tax than a £10 million Westminster mansion, so we are introducing a high-value council tax surcharge on homes worth £2 million or more, while protecting those on low incomes. We are raising taxes on property, dividend and savings income, which currently face no equivalent of national insurance, by 2% at the basic and higher rates and by 2% at the additional rate for property and savings income. The cost of pension salary sacrifice was set to almost treble from £3 billion in 2017 to nearly £9 billion by the end of the decade, so we are capping the amount that can be salary-sacrificed into a pension without paying any employee or employer national insurance at £2,000, protecting low and middle earners while retaining in full pension tax relief worth over £70 billion a year.
Alongside this, we are making reforms so that our tax system keeps pace with a fast-changing economy by ensuring that motoring taxes cover electric vehicles via a new per mile levy; increasing taxes on online gaming and betting while protecting bingo halls and horseracing; and preventing some ride-sharing apps abusing a tax relief intended for coach tour operators to undercut black cabs. We are also supporting our high streets with permanently lower business rates for over 750,000 retail, hospitality and leisure properties, funded with higher rates for the most expensive properties, including warehouses used by online giants. These are fair choices, with increases in tax coming most from those households in the highest income decile. They are choices that underpin and enable our growth agenda of cutting borrowing and debt while refusing to cut investment.
On Monday, the Prime Minister set out the next phase of that growth strategy. First, we will reform the regulation of our nuclear industry to make it easier to invest and then extend that approach across our entire industrial strategy. Secondly, we will keep moving towards a closer trading relationship with the European Union. Thirdly, we will reform a failing welfare system. In the last five years of the previous Government, spending on welfare increased by £88 billion, yet we inherited a system where children could not afford to eat but taxpayers were asked to subsidise tax breaks on the lease of luxury cars. That is a broken system, and we are reforming it. Britain, one of the richest countries on earth, still has children growing up in poverty. A Labour Government will always fight the social injustice where children, through no fault of their own, go to bed hungry and cold, their life chances shrinking every day.
Poverty scars our society, but it scars our economy too. It drives down growth and productivity; it heaps pressure on already stretched public services. Children who grew up in poverty earn 25% less aged 30 than their peers. All this costs our economy an estimated £40 billion a year. I am proud to have worked for the previous Labour Government who cut child poverty by a million over a decade. I was angry when we had to watch the Conservative Government who succeeded us reverse all our progress and increase child poverty by 900,000, at terrible social and economic cost. Now, I am proud to be a member of a Government who, by scrapping the two-child limit, are lifting 450,000 children out of poverty in a single step. Combined with other steps we have already taken, including extending free school meals to more families, this Government will now be responsible for the largest reduction in child poverty ever achieved in a single Parliament.
I am proud too of what this Budget and this Chancellor have achieved: not just cutting child poverty but cutting energy bills by £150; cutting NHS waiting lists; cutting borrowing more than any other G7 country; cutting inflation; supporting further cuts to interest rates and rejecting austerity. These are the right choices for a stronger NHS, the right choices for investment, the right choices for business and for workers, and the right choices for Britain to continue building a stronger, more secure economy. I beg to move.
“One of the reasons we had a very weak growth number … is … Budget speculation”.
That speculation was initiated and carried out by the Government themselves.
On process, the OBR’s view of the Government’s breaking of budgetary conventions is set out clearly for us all to see on page one of its report, in the beautifully understated yet lethal prose of the UK mandarinate led by Richard Hughes. We all suspect that he was eased out as much because he authored it as because of the admittedly serious leak of the OBR document on Budget Day, but I shall quote it so we can all enjoy the performance. Describing the production of its forecast, the OBR says:
“Given the unusual volume of speculation on the subject prior to the publication of this--
report—
“the Chair has taken the unusual step of writing to the Chair of the Commons Treasury Committee to set out the facts concerning the evolution of our forecast over the course of the past four months”.
“Unusual” indeed—it is a devastating indictment of Treasury Ministers’ behaviour over the Budget period by those in the best position to judge the facts. Anyone who thinks this is insignificant should just look at the turmoil on the bond markets between 4 November and the day of the Budget—a gift for hedge funds and investment banks, with small investors and more conservative funds left out. Indeed, savers were frightened into withdrawing record amounts from the stock market over the last few months.
The Chancellor and the Prime Minister fought the last general election with a promise of minimal tax rises. The Labour Party has now increased taxes by £40 billion and £26 billion in successive Budgets, taking the total projected burden to 38% of GDP by 2030, an all-time high. It promised that any tax increases would spare working people. So how has that fared? Badly is the answer, if we consider the freeze in income tax thresholds, or the new tax on dividends and landlords, or last year’s huge employer national insurance increase, which in time reduced pay. The hikes in IHT on family businesses, farms and pension savings, which affect many working people, are still to bite. The Chancellor has delivered a Budget not for working people, not for the country, but for the good of her party and her political career.
Last week, the Chancellor refused to rule out future tax rises. The OBR has said that this uncertainty is harming and will continue to harm our economy. It says on page 6 of the report:
“We expect quarterly growth to pick up only gradually in the near term as … domestic business and consumer confidence remains subdued, including in anticipation of further tax rises”.
But why this fear of tax rises? It is because, just over a year ago, the Chancellor told business leaders at the CBI conference that:
“We’ve put our public finances back on a firm footing. Public services now need to live within their means because I’m really clear, I’m not coming back with more borrowing or more taxes”.
She is in the happy position of providing numerous powerful quotes—for the Opposition.
The Chancellor is shoring up problems for later. Many of the tax rises, notably the increases in thresholds, only kick in between 2028 and 2031. The fall in borrowing depends on this tax tail. Is it realistic to think that this will actually happen in an election year? I think not.
It would be remiss of me not to mention SMEs. What was in it for them? There was a small positive on apprenticeships, but meagre and previously announced reforms to EMI schemes, VCTs and listing reliefs, massive new pressures on payroll from the threshold freezes, minimum wage hikes and salary sacrifice cap, a tourist tax, which will dampen demand, and a hideous mix-up over business rates which will lead to the closure of pubs and hotels.
More than 5 million people are now receiving out-of-work benefits with no work-related requirements. Since October 2024, the number of people in payrolled employment has fallen by 180,000. Yet instead of tackling this, the Government have chosen measures that make it worse. The Chancellor has raised the costs of employing people, raised personal taxes and weakened incentives to work. It is no surprise that the OBR now forecasts that unemployment in 2026 will be 240,000 higher than it expected in March. The decision to scrap the two-child limit compounds this failure. Evidence from the Centre for Social Justice shows that removing the cap interacts with the expansion of health and disability benefits to create benefit entitlements that, for many households, exceed typical earnings by a wide margin. In taxing people and businesses to make it more lucrative to stay at home and not contribute at all, the Government have not only produced an unfair Budget but produced one for benefits street, as the leader of the Opposition has shown us with such energy and verve.
What about our national debt, which is now approaching 100% of GDP? Dealing with this is vital, as in 2025-26 the OBR expects debt interest—yes, interest—to total over £110 billion. Of course, the underlying debt has been accrued over many years. Unfortunately, we do not have a strong plan to reduce it. This is not helped by the fact that we now pay more interest on debt than any OECD country bar Iceland and at a rate higher than that paid during the premiership of Liz Truss, whom the Government are quick to criticise.
The Government have pledged to raise defence spending to 3.5% by 2035, yet the executive director of the Henry Jackson Society has said that the Budget
“talks up defence investment, but the numbers … don’t match the rhetoric … the OBR shows a £32 billion black hole under its 3.5 per cent defence pledge”.
If we want to understand the real effects of this Budget on our economy, we need look no further than the OBR. Its verdict is crystal-clear: the Government’s choices have not improved the economic outlook but made it worse. The OBR has downgraded the UK’s rate of growth in productivity to 1% per annum and, because of decisions taken in the Budget, it states that this package will have
“no significant impact on output”
now, and not even by 2030. Inflation will be higher for longer; unemployment is forecast to rise; increases in household disposable income will collapse from 3% to 0.25% per annum; mortgage costs will rise; the real rate of return on investment by business has been downgraded; the forecast for business investment has been cut once again; public sector net debt rises in most years of the forecast; and a sharp fall in additions to housing stock is expected. Compared to March, the picture is even bleaker: potential output is down, productivity is down, real GDP is down, corporate profits are down and inflation is up.
The Chancellor asked the country for trust; the OBR has told us why she does not deserve it. She promised a plan for growth; the forecasts show stagnation, contraction and diminishing prospects for working people. She promised to protect households; the evidence shows higher taxes, lower incomes and rising mortgage costs. She promised to support business; the OBR shows investment down, profits down and confidence falling. She promised to repair the public finances, yet debt rises in almost every year of the forecast.
The Minister again claimed that our economic problems are all the fault of the last Government. I simply say that it is time he accepted responsibility for his and his colleagues’ failures. After all the noise, all the speculation, all the briefs and counterbriefs, we are left with this unavoidable truth: this Budget does not meet the moment. Our country deserves better than that.
My colleague Al Pinkerton, in another place, who has taken over from the noble Lord, Lord Gove, as Member of Parliament for Surrey Heath, is tabling a parliamentary Bill calling for the UK to renegotiate a bespoke new customs union with the European Union—the biggest single step we could take to boost our economy. The Government’s proposed reset with the EU, from a youth mobility scheme to a sanitary and phytosanitary agreement, has gone nowhere. We believe that the EU would welcome a bespoke new deal, which would generate over £25 billion a year for the Exchequer.
Of course, the other, rather different elephant in the room, which nobody has yet mentioned, is the impact of artificial intelligence. This is clearly the most significant invention since the internet, and the impact on the economy will be significant. Many of us suspect that the Chancellor is hoping that the impact of AI will enable her to reduce the burden of taxation by the time of the next election. Whether this forecast assumption is correct remains to be seen. I tend to agree with the American economist JK Galbraith that the only function of economic forecasting is to make astrology look respectable. Let us hope the stars are aligned for the Chancellor.
The help on prices is in some respects important because it impacts inflation, but it is important too that this is a short-term device. If real disposable income grows as slowly as is forecast, it will still seem like a cost of living crisis.
Getting a grip on public expenditure remains a very important issue. First, we have seen very poor productivity performance in government activities in recent years. Secondly, there is the issue of welfare payments and how to ensure that help goes to those most in need. We need to avoid the perverse incentives that keep some people out of the labour market, and we need more robust controls over those who game the system.
For me, future Budgets should give much more attention to tax reform. We need to iron out cliff-edge disincentives, widen the tax base and close down loopholes. In the absence of a surge in growth around the world, I fear that the job of fiscal retrenchment is not over. We need to make much more progress on reducing the debt ratio during the welcome calmer periods between crises, so that we are in rather better shape when the next problem arises.
I am proud to know that in my diocese of Portsmouth, churches, faith communities, and volunteers of all faiths and none have put their shoulder to the wheel in supporting those facing poverty in these years. In the Charles Dickens ward of inner-city Portsmouth, over 50% of children live in crushing poverty. In partnership, we serve food banks and provide warm spaces and outreach projects, but none of this will have the impact of the Government’s decision to end the two-child limit, which has been a leading driver of child poverty for nearly a decade, crushing aspiration, hope and opportunity. I commend the Government for this decision, but I hope and pray that this is the beginning of a renewed commitment to investment in a generation of young people.
The second area I want to highlight, and the two questions, relate to special educational needs and disabilities. In my routine work and ministry, head teachers and trust leaders across the diocese, in a wide number of communities and across England share frequently that supporting children with SEND and disabilities has become a particularly pressing matter. I commend the families and teachers who are committed so passionately to work for the inclusion of every child. As my diocese bridges multiple local education authorities, I have seen at first hand the postcode lottery of SEND provision as it is played out for families in our communities. I know of looked-after children struggling to access education while waiting years for CAMHS referrals. We can do better than this: compounding the trauma and adverse childhood experience that have already disproportionately shaped their lives.
I note the intention to bring the cost of SEND provision into the central government spending envelope from 2028-29. This will be a relief to councils holding significant deficits, but I am deeply concerned that no indication has been given to date of how the estimated additional cost involved will be covered—according to OBR, £6 billion by 2028-29—without causing a significant fall in mainstream funding for schools. I note, too, that from 2028, the Government will not expect local authorities to fund future special educational needs costs from their general funds once the statutory override ends at the end of 2027-28.
Once again, I note and welcome the intention to end the statutory override, which keeps SEND spending deficits off councils’ books. But I would welcome some assurance from the Minister that accrued benefit deficits in local authority spending on SEND will not be paid off or reconciled by using the mainstream schools budget. Would the Minister agree with me that further cuts to per-pupil funding risk widening inequality and constraining further schools’ ability to deliver outstanding, aspirational education, perhaps especially for our most disadvantaged and vulnerable children?
Those who conjure up an image of social security claimants enjoying some kind of bonanza conveniently ignore the £50 billion a year estimated to have been chopped off the social security budget as a result of Tory cuts, freezes and restrictions. The real problem today is not the mythical so-called ballooning welfare budget but a social security system that fails to provide genuine security for both those in and out of work. One consequence has been growing reliance on food banks especially among families with children. As the Trussell Trust stated, in welcoming the Budget:
“A future without hunger will only be possible by building a social security system that works for everyone”.
Investment in social security is top of the agenda for many who have given evidence to the Child Poverty Taskforce. I hope very much that it will respond positively in the child poverty strategy. In particular, the impact of the Budget announcement on the depth of child poverty will be dampened if the benefit cap continues. An estimated one in 12 children escaping the frying pan of the two-child limit will be no better off, because they will be caught in the fire of the cap.
Together with the damaging freezing of the local housing allowance, the cap is contributing to homelessness and has a disproportionate effect on domestic abuse survivors and their children. Action on both would therefore contribute not just to the child poverty strategy but the homelessness and violence against women strategies. But, if the cap is to be retained, could my noble friend the Minister at the very least pass on to the DWP the message that its level needs to be uprated annually in line with universal credit, to prevent more and more children being caught in it? As it is, there has been only one increase since 2016 when it was cut.
Abolition of the two-child limit is, as we have heard, the single most cost-effective lever to reduce child poverty. But no one pretends it can do the job on its own—hence the importance of the forthcoming child poverty strategy. UNICEF recently warned:
This Budget will draw some of that poison from our society, to the benefit of children and us all.
I agree with the Chancellor that putting the finances on a stable footing is the precondition for growth. The question is, how is this consolidation to be achieved: by tax rises, public spending restraint or a combination of both? History shows that fiscal consolidations based on spending cuts are more successful than tax-based ones. They lead to a more sustained improvement in public finances and do less harm to growth. There are plenty of candidates for saving, of which welfare is the most obvious. Even the Prime Minister has said that the welfare bill is “unsustainable”. The OBR has said that the welfare bill is unsustainable. Yet the Government, while talking about reform, do little. They seem powerless to act.
The Chancellor says there will be “no return to austerity”, but by imposing so much of the fiscal adjustment on taxpayers and the private sector, she is inflicting her version of austerity on ordinary people. Household disposable income is set now to grow at an average of only 0.5% per year—the second-worst period for living standards since the 1950s. This is half the average of the last decade and was described by the IFS as a “dismal” prospect. The question is: will the Budget, with all its front-loaded spending increases and end-loaded tax increases just before a general election, finally be seen as sufficient to silence doubts about the UK’s fiscal credibility?
Labour has spent a lot of time camouflaging its character. All the talk about fiscal rules cannot disguise the fundamental reality: this is a high-spending and high-taxation Government. The worst thing is that they will probably be back for more next year, and the British people will pay the price.
Much has been said about the OBR-Treasury relationship, and I will make just one observation. The process of dynamic scoring, estimating the long-term growth and productivity effects of major policy measures, is an important part of forecasting, but everyone can see that there are clearly issues and tensions in the way this process currently works, on both sides—in particular, which measures are considered sufficiently significant to score and using announcements to fish for dynamic scoring from the OBR. I hope this is an area where clearer rules of the game can be worked out in time for the next Budget.
I also support the Chancellor’s fiscal stance: spending and borrowing more in the early years of the Parliament, increasing taxes and tightening spending growth in the latter years, all while maintaining a significantly more expansive approach to capital spending. Yes, it is a strategy with risks, but taking a more aggressive fiscal stance now to improve growth and protect long-term investment spend is, in my view, the right approach after a decade of stagnation.
I also welcome the proposed council tax surcharge on high-value homes. There will, of course, be issues to sort out through consultation—for example, developing a system that is fair to those who are asset-rich and cash-poor, and the challenge of adding a tax system based on current prices of high-value homes on top of a council tax system that is still based on 1991 valuations.
This brings me to one last point on which the Budget had less to say: long-term tax reform. Tax policy is deeply political; nothing is more political. But, as the joint proposal from nine think tanks across the political spectrum argued last month, there are many sensible structural tax reforms that all parties could endorse and that would increase fairness and revenue, such as addressing punitive marginal tax rates, reforming the VAT tax base, updating council tax valuations, and equalising tax rates on income from different sources. In opposition, Labour spoke positively of such reforms. I hope that we will set up work to address some of these in the remainder of this Parliament.