Labour has already broken its manifesto commitments
Hello Sunday Free Lunchers.
After a months-long run-up of leaks, U-turns and bloopers, Britain’s Labour government finally delivered its second tax-raising budget on Wednesday.
I won’t be dissecting it this week — but it’s fair to say it differed, a lot, from the package of recommendations I outlined in the November 16 edition.
Besides, the Financial Times has all the details and rigorous analysis covered here. (I also joined my colleagues Claer Barrett and Stuart Kirk, alongside tax expert Dan Neidle, in a webinar on Friday to assess what it means.)
Instead, I’ll be contesting chancellor Rachel Reeves’ claim at the end of her Budget speech that she has kept “every single one of” the party’s 2024 election manifesto commitments.
Much focus has been on Labour’s pledges neither to increase taxes on “working people”, nor to raise “national insurance, the basic, higher or additional rates of income tax, or VAT”.
The party relies on technicalities to deny it has broken its promises.
The government’s first Budget in October 2024 raised employer national insurance contributions.
At Wednesday’s fiscal event Reeves raised further revenue by extending a freeze to personal tax thresholds for three years. That isn’t a rate rise. But the Office for Budget Responsibility estimates that 5.4mn additional people will be dragged into the higher- and additional-rate tax bands by 2030 as a result.
Either way, the dispute over tax pledges misses a wider point. Labour’s manifesto made several other broad commitments that many voters will now feel are being stretched, if not broken outright. Here are a few:
‘Put the country back in the service of working people’
(Labour party manifesto 2024, page 12)
There are about 170,000 fewer “working people” on payrolls since Labour came to power in July 2024.
The party’s decisions to raise employer NICs and the national minimum wage in its first Budget have been driving factors. Indicators of private sector hiring activity have been in contraction every month since those measures were announced.
More than 40 per cent of organisations said they had reduced employee numbers in response to the payroll tax rise, according to the Bank of England’s Decision Maker Panel survey last month. One-third said likewise for the statutory wage policy.
‘Labour will take action to support families, by tackling the underlying causes of the [cost of living] crisis’
(Labour party manifesto 2024, page 20)
UK inflation has shot up since the cost-raising measures for businesses in Labour’s first Budget came into force in April.
“The government has undoubtedly added to, and extended, the inflation problem with its generous public pay settlements and minimum wage increases,” says Paul Dales, chief UK economist at Capital Economics.
In this year’s Budget the government outlined only quick fixes, from freezing rail fares to temporarily refunding electricity suppliers to cut prices. But the OBR still expects inflation to stay “higher for longer” than in its March forecast.
Real household disposable income per person is set to grow over this parliament — but only at one of the slowest rates on record, owing to low growth, frozen personal tax thresholds and elevated inflation.
‘Every commitment a Labour government makes will be based on sound money and economic stability’
(Labour party manifesto 2024, page 18)
Measures of economic policy uncertainty have been more elevated in Britain than the rest of the world since Labour took power.
The UK has faced the same tariff-related volatility as other nations. But the government’s fiscal mismanagement has made matters worse.
Confidence-sapping rumours of tax rises preceded and followed Reeves’ first Budget, after she left minimal headroom against her main fiscal rule. Then came U-turns on welfare spending cuts and months of speculation ahead of this year’s Budget.
With two tax-and-spend fiscal events in a row, the party’s commitment to prudent fiscal policy is in doubt. Reeves has backloaded a lot of the latest Budget’s fiscal consolidation to the end of the parliament, risking lingering fiscal speculation.
“Labour has run a higher budget deficit than its predecessor projected and a higher deficit than it projected itself. This doesn’t necessarily mean it has fallen short of its commitment to ‘sound money’, but it may do so if this becomes a habit,” adds Capital Economics’ Dales.
The government’s chaotic approach to fiscal and economic management has kept UK borrowing costs elevated, too.
‘ . . . economic growth is . . . Labour’s first mission for government’
(Labour party manifesto 2024, page 25)
Business investment, sales and hiring activity have been sapped over Labour’s term.
Expectations for next-quarter output have been in negative territory ever since the October 2024 Budget, for one of the longest periods outside a recession, according to a CBI survey of businesses across sectors.
Alongside higher costs for business, Reeves’ first Budget raised levies on investors, the wealthy and non-doms, creating a funk around the UK’s competitiveness.
On Wednesday, a downgrade to the OBR’s historically optimistic productivity estimates has contributed to lower economic growth forecasts for every year until the end of the decade. But the chancellor’s package lacked any significant growth measures. (A climbdown on day-one workers’ rights regulation offers small relief.)
It also pushed statutory wages higher and thousands of employers are set to pay higher business rates. The OBR now expects business investment to fall next year, marking the first decline in six years.
A squeeze on earnings — thanks to the tax threshold freeze — and more levies on the well-heeled are set to dampen economic confidence further.
‘Labour will get Britain building again . . . with 1.5mn new homes over the next parliament’
(Labour party manifesto 2024, page 36)
“Britain isn’t building: starts and completions are down, largely due to building safety and planning policies that predate the government,” says Sam Dumitriu, head of policy at Britain Remade, a think-tank.
“Still, Labour isn’t doing enough to turn it around: our analysis of planning applications suggests the party will miss its 1.5mn homes target and, at current rates, won’t even outbuild the last government,” he adds.
While the government has made some promising efforts to reform planning, without broader economic confidence a building boom will remain elusive. The UK construction sector has shrunk for its longest continuous period since the global financial crisis.
Labour could correct course by the end of its term and then claim it has remained true to these broader commitments. But the prospects of a turnaround aren’t promising.
Reeves’ latest Budget doesn’t address Britain’s underlying problems of rising spending and chronically low productivity. Her new fiscal headroom risks, once again, being eroded by low growth and uncertainty, leaving the door open to yet more growth-sapping tax rises.
The party will struggle to break this doom loop. Internal divisions limit its capacity to impose meaningful spending restraints. Its policy choices so far also convey a poor understanding of how the private sector drives growth — and, ultimately, generates the tax revenues the government needs.
This may stem from a lingering scepticism towards business or the cabinet’s limited private-sector experience, a topic I’ll explore in a future edition.
Labour’s economic inheritance was indeed poor. Low productivity, stretched public services and high bond yields are a potent mix. But the party now risks making the endowment even worse for its successor.
Send your thoughts to freelunch@ft.com or via X @tejparikh90.
Food for thought
Economic strength comes not just from the gains a nation derives from trade, but from how much it supports the prosperity of its partners, too. This column introduces the concept of the “trade-benefit ratio”.
Free Lunch on Sunday is edited by Harvey Nriapia
