Will Rachel Reeves’s borrow-and-spend Budget actually work?

Business will bear the burden of this Budget, so the chancellor must hope it delivers a better economy, says Howard Mustoe

Rachel Reeves makes history as she leaves 11 Downing Street with her ministerial red box (PA Wire)

Chancellor Rachel Reeves hopes her historic rise in tax, coupled with spending on the NHS and other investments, will kickstart the economy and get Britain’s debt under control.

The level of her ambition and the size of the mountain she must climb can be seen in the numbers. Britain owes £2.7 trillion – an amount set to creep up each year through the rest of this parliament, and growth is expected to be no more than 2 per cent over the same period.

Ms Reeves plans on raising tax by £40bn, much of it from businesses. She will spend £22.6bn more on the NHS to get it back on its feet.

Paul Johnson of the Institute for Fiscal Studies said her gamble is twofold.

“The first gamble is that a big cash injection for public services over the next two years will be enough to turn performance around,” he said. If she gets it wrong, she will need to raise taxes again. If she gets it right, it could mean growth.

“Which brings us to the second gamble: that this extra borrowing will be worthwhile,” he added.

Will the chancellor’s big gamble pay off? (House of Commons)

Borrowing will be stepped up over the next four years, from £59bn a year to £85bn a year, with the funds earmarked for schools, hospitals and green energy projects. If this spending helps growth, her plan will work – but more debt means more debt payments.

In both bets, the speed of borrowing and spending begs big questions about waste.

“A lot hinges on how well the government spends the money,” Mr Johnson said. “The additional investment is extremely front-loaded, which doesn’t fill me with confidence on how efficiently it will be spent – if indeed it is spent in that timescale.”

As well as setting herself ambitious targets in investing and raising funds, Ms Reeves wants the government’s income to be greater than its expenses in five years, a key measure of whether a government is balancing its books.

The Office for Budget Responsibility said the chance of this happening in that timeframe is 54 per cent. It predicts even longer odds on public sector net financial liabilities (PSNFL), a debt measure, falling as a share of the economy over the same period: 51 per cent.

Ms Reeves plans on raising tax by £40bn, much of it from businesses (PA Wire)

It may seem a rash bet with such large sums involved. But Ms Reeves is correct to be ambitious if she wants growth, said James Smith, research director at the Resolution Foundation think tank.

“The scale of the tax and spending increases highlights the magnitude of the economic challenge Britain currently faces. It has taken the biggest tax-raising Budget on record to reverse much of the implied cuts to public services baked into plans inherited from the last government.

“The chancellor will hope that the legacy of this Budget will be the £100bn boost to public investment, which should boost Britain’s long-term growth prospects.”

If growth is coming from anywhere, it is coming from Britain’s smaller enterprises, some of whom feel they’ve been hit especially hard in this Budget.

Alice Wainwright said her subscription coffee company, Rise Coffee Box, has ambitious growth plans. “However, the new measures threaten to stifle this momentum and will force us to make difficult decisions in the next year,” she said.

“The hike in employers’ national insurance will stop us from making essential hires, and cuts to business rate relief will pause our plans for high street expansion. We had hoped for one or two initiatives that would encourage small businesses like ours to innovate and grow, but instead, we’re feeling squeezed from all sides.”

Another task that will require a lot of effort is to get more out of the public sector, with a target of annual productivity improvements of 2 per cent.

Barret Kupelian, chief economist at PwC UK, said: “This seems ambitious, given a flat rate of net public sector productivity growth for at least the past decade – but perhaps achievable with the renewed emphasis on capital spending, supported by a new fiscal rule on public investing.”

Harry Quilter-Pinner, interim executive director at the IPPR think tank, said he is optimistic about Ms Reeves’s plan but the chancellor has her work cut out. “The new government inherited a terrible economic situation after many years of crisis and mismanagement,” he said. “Today, the chancellor has taken important steps towards building a better Britain. But decades of economic damage cannot be undone in one Budget.”