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Any major fiscal event carries inherent risks.
For a government facing widespread disapproval, potential pitfalls abound.
With the Chancellor’s key decisions now public, what constitutes the best-case scenario for the opposition, and what are the gravest potential consequences?
On the positive side, Labour MPs have returned to their constituencies with a renewed sense of optimism this week, largely attributable to the Chancellor’s decision to abolish the limit on benefits for larger families.
The Prime Minister is expected to elaborate on the reasoning behind this decision in a significant speech on Monday, arguing that it is not only the morally correct course of action for those in need, but also a strategic economic move for the present and future. He will further assert that the Budget will provide relief to families by alleviating energy costs and freezing rail fares.
Furthermore, the long-awaited strategy to combat child poverty is anticipated to be unveiled towards the end of the week.
This policy represents a clear endorsement of Labour’s values – the redistribution of taxpayer funds to the most vulnerable members of society.
According to a government source, it reflects “a reaffirmation of values, something that MPs desired, a more assertive stance on the government’s beliefs and its vision for a Labour administration.”
In essence, addressing a key concern voiced by many Labour MPs – including prominent figures like Bridget Phillipson – has significantly improved morale following months of discontent and uncertainty surrounding the leadership’s direction and capabilities.
While the policy may not be universally embraced by the public, it strengthens the leadership’s ability to rally support from its backbenchers and maintain party unity. However, given the substantial majority secured in July 2024, such internal management should ideally not be a concern.
Party cohesion is a fundamental requirement for any effective government, particularly one with a commanding majority. Yet, Labour’s tenure has been marked by periods of instability, with the leadership struggling to maintain discipline among its MPs.
The most favorable outcome would be for the Budget’s benefit adjustments to provide Labour with a clearer identity and a more comfortable ideological platform. From a strategic perspective, another government source suggests that “there will be a noticeable shift in demeanor, and we are prepared to engage in robust debate.”
If this sense of stability can be sustained – a significant caveat – it could foster a more settled political climate and boost business confidence, potentially stimulating economic activity despite substantial tax increases, increased welfare expenditure, and the nation’s considerable debt burden.
Despite extensive preparations, the markets did not experience any major disruption following the Budget announcement. This is a crucial consideration given the government’s reliance on borrowing from investors.
Business leaders hope for continued stability and an end to incessant political maneuvering. As one executive remarked, “The best-case scenario is that this provides stability – the government can focus on its agenda, and we see an economic upturn. It’s not as if other governments are excelling globally.”
Another executive of a multi-billion dollar company stated, “An extra £26 billion in taxes is not ideal, but I believe the Budget will bring stability. While criticism is common, perhaps it’s time to offer them some leeway.”
Polls, however, do not indicate widespread public support. Initial surveys following the Budget have been critical of the Chancellor’s proposals. More than a million people will face higher income taxes or be subject to income tax for the first time – a situation rarely met with enthusiasm.
Inflation is projected to be higher than previously anticipated for the current year, and forecasts for the growth of personal spending power are “dismal”. Nevertheless, a government insider suggests that the best-case scenario “has to be an uptick in the polls and a stronger message for May,” referring to the upcoming elections in Scotland, Wales, and various regions of England, where Labour is widely expected to suffer significant losses, potentially jeopardizing the leadership.
The Budget has not exacerbated that immediate danger, which, given recent challenges, is a relative success. However, one party insider quipped grimly, “The best-case scenario for the PM is that he survives until May, and then faces a failed leadership challenge.”
What about the worst-case scenario?
The ink on the Budget headlines was barely dry when a new political controversy emerged regarding a partial reversal on expanding workers’ rights. Some within the party found the timing perplexing. As one senior figure lamented, “In terms of party management, why do this now? You had restored calm, bond yields were stable, Labour backbenchers were content, and then you create unnecessary turmoil!”
Separately from the Budget, unions, businesses, and government officials have been attempting to reach a compromise on the length of employment required before workers can claim unfair dismissal.
For some in the unions and the party, relinquishing day-one protection from unfair dismissal was a necessary concession to ensure the passage of broader workers’ rights legislation. However, this decision has angered some on the left.
A source involved in the negotiations with unions and businesses explained that “you can’t schedule the negotiations” – implying that the announcement could not be conveniently incorporated into a government timetable.
While the partial retreat is unlikely to trigger a major crisis – one of Angela Rayner’s key allies who championed the wider plans expressed “slight concern” rather than outright fury – the incident undermines the notion that the Budget would resolve internal disputes within the party.
Another source within the Labour movement issued this warning: “It’s a ludicrous decision – it was a clear manifesto pledge. It’s not complicated, and it has strained the relationship between Labour and the trade unions, creating unnecessary tension for the leadership in the event of disappointing local election results.”
In other words, the leadership should be on alert.
Beyond the political ramifications, the Budget also represents a significant economic event, and the economic outlook is not favorable. Debt levels remain exceptionally high. Growth is projected to be sluggish for years to come, remaining below expectations until 2030. Government spending, particularly on welfare, is increasing steadily.
This is difficult to reconcile with the rhetoric espoused by Reeves and Starmer before and after the general election, which prioritized economic growth as a means of enabling businesses to thrive and create jobs.
As one financial figure observed, “The left wing of Labour may dislike business, but it is business that generates the revenue to fund their priorities. The triple lock, welfare programs, and the NHS cannot be sustained without a growing economy.”
Another senior business leader stated, “I think we are somewhat in trouble – by the end of the decade, we will be spending nearly £400 billion on pensions and welfare. Growth is clearly not the top priority.”
The minimum wage is increasing, and business rates are rising for many companies. Even a union representative conceded that “growth has been deprioritized.”
For one city insider, it appears that Reeves’s efforts to cultivate a positive relationship with the business community before the election have been in vain. “They have sacrificed any opportunity to genuinely drive growth, support aspiration, and build an economy around thriving businesses and entrepreneurship in favor of securing their positions. Taxpayers and businesses have been betrayed, and both have long memories.”
“All the pre-election rhetoric about being the party of business and growth was a facade. Everyone recognizes that now, and they will not forget it.”
Government officials dispute this assessment, pointing to decisions on Heathrow and new nuclear projects. They argue that “if those businesses want to employ skilled workers in the future, it’s beneficial for those children to have their basic needs met during childhood.”
Starmer himself will emphasize the government’s unwavering commitment to growth in his upcoming speech, and is likely to reiterate his intention to streamline regulations and expedite the planning process. Downing Street insiders dismiss the notion that the new focus on child poverty diminishes their commitment to supporting business growth.
Multiple sources suggest that Labour’s return to a more traditional focus aimed at pleasing its base removes what occasionally appeared to be a contradiction – simultaneously prioritizing business profitability and pursuing its own ideological values.
One former minister suggested that the high-tax, high-spending budget had clarified the differences between the two parties as distinctly as in 1992.
However, in the worst-case scenario, the economy will continue to stagnate. As one business leader warned, the minimum wage increase and higher taxes could lead to “everyone simply choosing not to hire – there is nothing to inspire confidence when we desperately need it.”
The Treasury might hope for unforeseen improvements, perhaps driven by advancements in AI, planning reforms, or other factors. However, current projections offer little cause for optimism.
Finally, the decisions contained in the Budget could further erode public trust in the government.
This is not merely because the Chancellor is increasing income taxes by freezing tax thresholds, despite repeated promises to the contrary, potentially violating the spirit, if not the precise wording, of the party’s election manifesto. Reeves is also accused of misrepresenting the government’s financial situation in the lead-up to the Budget.
The Chancellor repeatedly, and unusually publicly, alluded to financial constraints that would necessitate difficult decisions, namely, raising taxes.
This narrative was carefully constructed over several weeks to soften the impact of the tax increases on the public and the markets. Some leaks were unintentional, while many briefings were deliberate, including suggestions that the Office for Budget Responsibility (OBR) numbers had arrived at the last moment, presenting a more favorable outlook than expected.
However, the OBR had informed Rachel Reeves weeks prior that increased tax revenues had eliminated the need for austerity measures. The Conservatives have accused her of misleading the public about the figures, an accusation vehemently denied by Downing Street.
Even a Labour insider questioned whether the government had overstepped the mark: “Everyone understands the political game, but there is a line between skillful maneuvering and blatant deception of the public and the press.”
In the worst-case scenario, the messy budget process will further undermine trust in the government, providing opponents with further ammunition to accuse them of dishonesty and misconduct.
Budgets can spectacularly unravel. That did not happen this week. Given the numerous challenges facing this government, that fact alone is a victory. And Labour has clarified its political identity, to the relief of many within its ranks. But that’s not the same as pleasing the public.
The financial picture doesn’t give much cheer. In the end, there may not be much economic comfort in the political comfort zone.
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Pub bosses have warned they face a sharp rise in business rates bills despite government support.
Bridget Phillipson told the BBC the climbdown would enable wider benefits to be delivered quickly.
The UK and Manx economies face similar pressures, says Isle of Man Finance Minister Alex Allinson.
The change in policy comes after Prime Minister Sir Keir Starmer wrote to President Emmanuel Macron.
The right will now be introduced after six months, in a breach of Labour’s election manifesto.
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