Despite the insistence that the Spring Statement would not be a ‘fiscal event’, there is no other way to describe it. Reeves may not have ended the afternoon with a photo op clutching her red box outside No. 11, but we have seen some significant fiscal policy changes. In October, Rachel Reeves unveiled her first budget. There was not a lot to like. It increased government spending by a massive £70bn per annum, paid for by current taxpayers through a £40bn rise, and future taxpayers through an additional £30bn of state borrowing.
The hike in Employer National Insurance Contributions, from 13.8% to 15%, as well as reducing the threshold at which employers begin paying, was perhaps the most damaging. The Government continued to harp on about not increasing taxes on ‘working people’, whilst failing to consider that these rises would in fact be paid for by any definition of working people. This is the fundamental difference between the impact of tax and the incidence of tax. The impact is who pays it, which in the case of the Employer NIC rise is UK employers.
The incidence is who really pays for it, which is employees. This is because in order for businesses to afford the additional cost of an employee, they will either not hire anymore people, freeze wages, or in some cases, let people go.
It makes sense. If the Government makes it more expensive to employ people, businesses won’t be able to afford hiring as many people or increasing wages. Now, the Office for Budget Responsibility (OBR) has predicted that some 76 per cent of this hike will be passed on to employees through lower wages.
The spring statement has not solved these long-standing problems. The OBR has halved their official economic growth forecast for the 2025 financial year, which is yet another blow to hard-working people across the country. It means less pay, fewer jobs, and fewer opportunities.
Most shockingly, we are now just one year away from the highest tax burden in history. In 2025-26, taxes will hit 36.8% of GDP. By 2026-2027, they will climb to 37.4%, which tops the post-war record set in 1948.
In the following year, it will climb again to 37.7% of GDP, meaning that two out of the three highest tax burdens in British history will have been with Rachel Reeves as Chancellor.
Working people deserve to keep more of what they earn, rather than have it squandered by a bloated and inefficient state.
The welfare state costs have skyrocketed over recent years. With almost 3 million people on long-term sickness benefits, it is a moral imperative that those that can work are given the incentive to do so.
A significant proportion of these people are able to work with the right support. We must not consign those people to a lifetime of worklessness.
So, Reeves is right to try and cut spending, but what we have seen is a drop in the ocean. The widely publicised benefit saving of £4.8 billion could be entirely offset by a promise of additional spending on more elsewhere, for example on staff.
Even if her projection of £3.4 billion of savings does actually happen (of which there is no guarantee), this pales in comparison to the scale of the problem.
I hope, for the sake of the futures of the 1 in 8 young people not in employment, education or training, that the reductions in the welfare state will get people who can work back into work.
Increased defence spending is welcome in an uncertain world, but turning it into a ‘modern industrial strategy’ makes it clear that the Government does have an incredibly state-run ideology on economic management.
This view is almost certainly going to disappoint. We need fundamental reform of the British state. The Government is talking about lifting burdensome regulations, but it needs to actually act.
They need to stop talking about lifting regulations on businesses, whilst simultaneously imposing more. Where they have done it for planning, the benefits for growth are clear, adding 0.2% to GDP. If it so easy to do with fairly modest regulatory reform, why not repeat this lesson across the economy?
Fundamentally, working people deserve to keep more of what they earn, rather than have it squandered by a bloated and inefficient state. The Government must go so much further in reducing public spending. We shouldn’t be trimming the fat, but instead be putting the Government on a high dose of ozempic.
Reem Ibrahim is the Communications Manager and Linda Whetstone Scholar at the Institute of Economic Affairs