Starmergeddon
Reeves is now a laughing stock as Labour's Budget disaster continues to unravel
Towering Columns
On his Substack, Neil O’Brien unpacks Reeves's tangled Budget.
What a mess. No-one can recall a messier Budget. What was the underlying problem? I’ll tell you: they tried to be too clever by half. We now know that Reeves knew all along she wasn’t facing a big black hole. The OBR told her on 17 September that the downgrade in productivity forecasts was offset by tax rich growth and inflation. Despite that, the Treasury were happy to stoke the idea that there was a huge black hole that would mean that income tax rates would have to rise.
Why did they stoke this? Simple: they wanted, on Budget day, to be able to reveal “more-positive-than-expected numbers” and then announce that there would be no change in rates - a nice budget “rabbit”. Hurrah! It is hard to overstate how dishonest the government were. On 5 November, we now know that Reeves knew that the OBR were forecasting billions of headroom against the government’s fiscal rules…but she still went on TV with an unprecedented pre-budget to create the impression that big tax rises were coming because of a deterioration in the public finances.
At no point in the process did the OBR have the government missing its fiscal rules by the large margins the government were briefing journalists about. (Remember the black hole of 20 billion or even 30 billion they told journos about?)
Reeves even argued two weeks before the budget:
“It would, of course, be possible to stick with the manifesto commitments, but that would require things like deep cuts in capital spending.”
She said this, though she knew it wasn’t true…
…Why did they announce no rate increase beforehand? At some point someone in HMT panicked that markets might react badly to this last-minute surprise, and so reversed course - which really did spook the markets…What the Budget really does is not plug an imaginary black hole - but increase spending (mainly on welfare) and increase tax.
In The Telegraph, Gavin Rice says Britain’s finances will only stabilise if basic rate taxpayers share more of the burden.
The ultra-redistributive approach towards tax was pursued by the Conservatives for noble reasons – to protect modest earners from the impact of rising spending liabilities due to pensions, the NHS and the cost of the pandemic. It was achieved through the roll-out of the personal allowance and cuts to employees’ National Insurance. As a result, the average working household paid nearly £2,000 less tax on income in real terms in 2024 than in 2010. This provided some compensation for the lack of wage growth over the Tories’ 14 year term, and allowed the party to announce tax cuts for the majority while squeezing higher earners.
This incessant downwards pressure on the tax liability of basic ratepayers followed in the footsteps of Gordon Brown, who famously cut the rate to 20p while hiking taxes overall. The combined approach of taking ordinary people almost entirely out of tax was a kind of silent cross-party conspiracy. Liz Truss was wrong about almost everything – including wanting to cut the rate to 19p. But she was right about one thing: the “Resolution Foundation” approach to budgets, where every tax change must be even more progressive than the last, must end.
As tax experts Dan Neidle and Paul Johnson have noted, this squeezing of so-called higher earners is running out of road. The so-called “Henrys” – High Earning, Not Rich Yet – may just up sticks and leave, or choose to work less, given the incentive-destroying tax rates they face. The income distribution is already far too bunched, with the minimum wage rising to nearly 70 per cent of the median. What then is the incentive to work? Those earning £50-£150,000 are among the most productive in the economy. Why are we persecuting them? Broadening the tax base is not inconsistent with lowering the overall national tax burden. We need both.
For The Times, Juliet Samuel says Keir Starmer’s government is hamstrung by quangos and regulators it doesn’t control.
Ministers adopted their habitual pose of what the shrinks call “learned helplessness”, whereupon, realising they were going to have to explain themselves, they blamed the CPS and an obscure security official. The excuse was that the case’s collapse was the necessary result of Labour’s admirable respect for the sacred “independence” of legal process (this never quite explained the appearance of Labour’s mealy-mouthed manifesto language on China in the official government witness statement, but never mind).
Just as with the OBR, this denial of responsibility by ministers immediately triggered the release of an unprecedented series of “clarifying” letters from the agency concerned, which, with knife-like precision, used bureaucratic jargon to scrape the excrement directly on to ministers’ heads. Now we have the denouement, with a joint committee report on the debacle, concluding that they were all to blame, the bungling lawyers and the self-abnegating politicians forming an alliance of ineptitude in which the chief victim is national security.
One might wonder how it is that a government led by people whose main self-professed virtue was their worship of concepts like “civil service independence” and “the ministerial code” could find themselves not just in briefing wars but under direct fire by official letter from the very institutions they claim to treasure. Not even the nose-thumber-in-chief Boris Johnson managed to get into a direct scrap with the CPS, for goodness’ sake. As for the OBR, one of Reeves’s first acts was to pass legislation giving it formal power to publish its views on public finances regardless of Treasury directions, on the basis that this would make it harder for future, unscrupulous governments to fiddle the books. I suppose she would know. By their own standards, the government is guilty of undermining the “independence” of hallowed arm’s-length bodies. But the real crime is far greater: a failure to have any politics, to know what politics is for, to realise that the job of a leader is not merely to pay homage to bureaucracy but to renew and replenish the vitality of our institutions so we are fit to flourish in a new era.
Also in The Times, Simon French says energy inflation has devastating ripple effects through the economy.
One policy area stands out more than most. In the mid-2000s the UK had the same industrial electricity costs as the United States. At 3.8p/kWh the UK’s electricity costs were the same as the average of all the countries that are members of the International Energy Agency (IEA). Two decades on, this price has risen six-fold. UK electricity prices are now the highest in the IEA, and 2.5 times higher than US industry electricity prices. This permeates all parts of the economy from the hairdresser’s heating its salon, to the pub warming its bar area, to the manufacturer powering its machines. Hyperscalers are not going to bring their AI-fuelled activity to the UK given their huge appetite for energy. Almost every domestic price, at some stage in the production process, comes into contact with energy costs.
While some of this higher energy price — particularly since 2022 — has been the result of volatile gas prices associated with the Ukraine war, that commodity price has now reverted close to its pre-war level. Yet the prices facing business remain penally high. In November, Neso, the National Energy System Operator, released a discouraging report on the outlook for UK gas supply security. The UK is on track to supply just 3 per cent of its own peak gas demand by the winter of 2035, having supplied an average of 36 per cent over the last decade.
More maddening still is that the shortfall is being filled by Norwegian supply from the same geological area as the UK, or by more polluting and less secure imported liquefied natural gas (LNG) from countries such as the US and Qatar. It is hard to think of a more damaging policy for living standards, for inflation, for tax revenue and for growth than the UK’s approach to securing a stable supply of natural gas. This failure also enables alternative suppliers of energy to the UK to keep their prices elevated, rather than face the scrutiny of competition.
And in The Telegraph, Lord Frost says Keir Starmer’s unpopularity may cause Labour’s plan to harmonise with the EU to backfire.
Want to get rid of net zero? “Sorry Minister, you’ve signed a treaty with the EU on that.” Want to free up our food sector with GMs and novel foods? “Sorry Minister, the EU sets those rules.” Want to cut needless over-regulation of cars? “Sorry, Minister, we are following EU rules on this.” This is the current direction of travel. Every time we accept the EU’s laws we are making life more difficult for ourselves and limiting our own choices.
I wish I heard these arguments made more often and more assertively by the Conservatives and Reform. Yes, both parties say they will reverse the reset – though perhaps not more than that. But the argument is couched too much in political terms, an accusation that Labour are “betraying” Brexit and the voters.
I don’t think it helps to speak in those terms. Voters need to be reminded that we risk moving from being a nation where ministers can decide the country’s future and have real choices about economic policy, to one where they can’t and don’t. Voters need to understand that the zombie figure of the Brexit hit to growth of 4 per cent, 6 per cent, 8 per cent, whatever figure it is today, is nonsense, and why – a totally implausible number unless you think that Britain would have been growing nearly as fast as America in recent years. Without such proper, serious, discussion once again about the EU relationship, not about whether we want a “new partnership” but what the hard economic trade-offs are, the case for economic freedom and independence seems to me to risk going by default.
Finally in The Times, Emma Duncan says Reeves’s Budget only deepens the unfair social contract facing younger voters.
First, even before the 2008 financial crisis productivity growth slowed around the rich world. Outside America, whose fast-paced economy is supercharged by tech, real incomes haven’t increased much in recent years. Confidence in the future has evaporated: 79 per cent of parents in this country — the highest number among 36 countries surveyed other than France — think their children will be worse off than they are. Second, Britain stopped building enough houses. Nimbyism took hold, planning became increasingly restrictive, regulations raised the cost of construction and demand among foreigners for property in London surged. Housing became unaffordable for the young. Third, there was a series of economic shocks. The financial crisis meant the banks had to be refinanced; the pandemic led to another splurge of state cash; the Ukraine war drove up inflation and interest rates. The national debt ballooned from about a third of the value of the economy before the financial crisis to almost the entire value of it now. Since debt is a claim on the incomes of future generations, that’s a burden we’ve placed on our children.
It’s not just debt that is going to weigh heavily on the young. A lower birth rate means the old age dependency ratio — the number of pensioners per 1,000 working people — is due to rise from around 280 now to 341 in a couple of decades’ time. Some of those pensioners have enough private savings to finance their retirement, but the workers of the future will be paying the state pensions of the future. The government should have used the budget as an opportunity to mitigate these problems. However gloomy we may feel, in fiscal terms these are the relatively good times. We’re not in the middle of a crisis or a recession, and this week the government got an unexpected break from the Office for Budget Responsibility, which downgraded productivity less than had been anticipated while projecting higher tax revenues because of higher-than-expected earnings.
The government has used some of the bonus to provide itself with more headroom in case of future shocks, but a larger sum has gone on extra welfare spending, including £3 billion on lifting the two-child benefit cap. The state continues to favour the old over the young: the triple-lock on pensions is staying and the level at which student loans have to be repaid has been frozen, bringing more young people into that net.
Wonky Thinking
Alex Chalmers published a report for the Centre for British Progress arguing for a major overhaul of UK defence procurement.
UK defence procurement routinely misses cost and schedule targets, leaving the armed forces without the equipment they need, when they need it. This is the product of five sins:
Overspecification – a bias towards bespoke, over-complex projects that take on unnecessary technical risk when simpler, proven options exist.
Inter-service rivalry – competition for prestige and budget between the services, driving duplicated capabilities and distorting investment decisions.
Short-termism and optimism bias – persistent underestimation of cost, time and risk, reinforced by annual cash limits and frequent churn in project leadership.
Weakening sovereign capability – a “feast and famine” pattern of orders and a failure to take a strategic approach to sovereignty that have hollowed out critical UK-based industrial capacity.
Slowness to innovate – procurement cycles and commercial rules that favour large primes and pilots over rapid adoption of software-driven, AI-enabled capabilities.
To tackle these five flaws, we should:
Overspecification – flip the default from bespoke design to proven kit:
Require an “off-the-shelf test” for every major project, with bespoke development allowed only via explicit ministerial direction.
Freeze requirements after nine months, with any later changes signed off by the Secretary of State and funded from the sponsoring Service’s own budget.
Create a permanent “90-day fast lane” for buying trusted, unmodified NATO/allied equipment off the shelf.
Inter-service rivalry – strengthen the centre while pushing some power closer to the frontline:
Extend the National Armaments Director’s (NAD) tenure to match major programme timelines, ensuring continuity and accountability.
Establish an independent UK CAPE-style cost analysis unit to provide unbiased estimates of cost, risk and alternatives.
Give the NAD a concept-stage veto on new programmes, overridable only by a public ministerial direction laid before Parliament.
Publish a quarterly readiness ledger, signed by the NAD, to expose raids on spares and training used to balance in-year budgets.
Increase brigade-level discretionary spending authority for off-the-shelf purchases that meet urgent operational needs.
Short-termism and optimism bias – align money, incentives and reality:
Adopt P75 cost and schedule baselines for all projects over £20 million, with clearly ring-fenced contingency.
Introduce automatic multi-year capital flexibility for the Equipment Plan so funding can move between years without constant Treasury approval.
Keep Senior Responsible Owners in post for at least five years, with incentives linked to delivery rather than initial approval.
Weakening sovereign capability – use procurement to rebuild resilience where it matters:
Disapply current social value criteria in defence, which add cost while doing little to strengthen strategically relevant UK capacity.
Introduce a consistent UK prosperity weighting for selected categories, heavily favouring meaningful UK activity (employment, IP, supply chains, manufacturing and assembly).
Professionalise defence procurement as a strategic supply-chain function, recruiting experienced commercial leaders and using combined government data to map and develop the UK defence-industrial base.
Slowness to innovate – create a real market for challenger defence technology:
Make “time to first use” a core metric in business cases, with every project required to set and justify an explicit band for time to deployment.
Focus accelerators on genuine start-ups, moving later-stage firms into mainstream procurement routes.
Unbundle hardware and software in major contracts so specialist software companies can compete directly rather than through primes.
Remove entry windows from framework contracts, moving to rolling, dynamic markets that new suppliers can join at any time.
Sponsor security clearances and provide central secure facilities for early-stage firms to break the current “no clearance, no work” trap.
Allow initial batch production outside standard competition rules, within defined caps, to test promising technology at scale.
Enforce the 10% ringfence for novel technologies, with published criteria and transparent reporting on how funds are used.
Permit upfront, in-full payment for selected contracts to enable start-ups to build factories and scale operations in Britain.
Podcast of the Week
On Monetary Matters, Michael Pettis discusses China’s “involution trap”. Pettis describes how for decades the global economy has relied on China suppressing domestic consumption to create manufacturing trade surpluses, and why the US trade deficit is only growing.
Quick Links
The Chancellor was accused of forcing the head of the OBR to resign, after the watchdog accidentally published its analysis of the Budget in advance.
The political editor of the BBC accused the Chancellor of misleading the public in the run-up to the Budget…
…while she also stands accused of misleading the Cabinet over the existence of a fiscal black hole.
A leaked policy document showed Labour planned to use a private member’s bill with government support to legalise assisted suicide while it was still in Opposition.
The global S&P manufacturing index was at a 14-month high…
…but global construction showed its steepest fall in more than five years.
The Institute of Directors’ Economic Confidence index hit record lows.
Business leaders said they will have to cut jobs and investment after the Chancellor’s property tax raid.
Tax changes introduced in the Budget may threaten employee ownership.
The West Midlands Police gave evidence to Parliament, accusing Dutch police of altering their evidence relating to Maccabi Tel Aviv in response to political pressure…
…and the Government’s anti-Semitism adviser said the force tailored evidence to secure a ban.
The Department for Education awarded the Islamic Finance Committee £174,000 to explore a “Sharia-compliant” model of student finance.