Rachel Reeves’s Budget will fail to boost Britain’s growth, leading economists have warned, as Sir Keir Starmer was forced to deny Labour had misled the public over its record £26bn tax rises.
In a damning assessment of the chancellor’s plans, the highly respected Institute for Fiscal Studies (IFS) said Ms Reeves had ducked measures that could have turned the dial on growth – previously the chancellor’s “number one priority”.
The Budget watchdog, the Office for Budget Responsibility (OBR), also said none of the dozens of measures unveiled on Wednesday would have a “material” effect on growth.
The withering verdict came as the prime minister sought to refute claims that Labour had broken its manifesto pledge not to raise taxes for working people – which the IFS roundly said it had.
As a row erupted over the manifesto pledge, Sir Keir insisted the tax-raising Budget had been necessary to help the NHS, schools and ease child poverty – but dodged questions on whether his government would have to raise taxes again.
In a day of drama in Westminster as experts digested the dozens of measures in the Budget, it also emerged that:
- The extended freeze on tax thresholds will hit lower earners harder than a 1p rise in the basic rate of income tax, according to an influential think tank
- Reeves’ pledge to take £150 off the cost of energy bills will fall to just £39 after three years, the IFS said
- The new “mansion tax” will cause the price of homes worth more than £2m to fall, experts predicted
- The OBR, which accidentally published the details of Ms Reeves’ Budget before she unveiled it, said an “external person” may have had access to the link as its boss offered to resign over the blunder
During a briefing on Thursday morning, the IFS urged Ms Reeves to be more ambitious about measures to boost growth, singling out reforms to the tax system as a way to do this. Forecasts for how much the UK economy will grow were downgraded by the OBR in its Budget analysis.
Director Helen Miller said: “Growth not only makes us richer, it makes almost every problem easier to solve. At the last Budget the chancellor said: ‘Every Budget I deliver will be focused on our mission to grow the economy.’ That wasn’t on show yesterday.
“It was never going to be possible to do such a large tax rise and have that be good for growth. But – and I am fully aware that I sound like a broken record here – tax reform was the way to ensure that taxes don’t do more damage than necessary.”
She added that Ms Reeves, like her predecessors, continued to shy away from meaningful tax reform that could move the dial. “This felt mostly like the Budget of a government trying to scrape through,” she added.
The IFS also compared the Budget to the “fiscal fiction” of previous governments, warning it contained “backloaded” measures and unrealistic predictions of future “spending restraint”.
Richard Hughes, the chair of the OBR, said “none of the measures” in Ms Reeves’ Budget would “have a material effect” on growth.
Meanwhile, as he came under pressure over measures in the Budget, Sir Keir insisted Labour had “kept our manifesto”, which promised not to raise income tax, national insurance or VAT on working people.
Ms Miller accused Labour of breaching the manifesto pledge, saying that, as a result of the income tax threshold freezes and other measures, national insurance, a tax specifically mentioned by the party, “will increase”. “I would call that a breach of the manifesto,” she said.
But the Labour leader denied the charge, telling Sky: “We kept our manifesto in terms of what we promised but I accept the challenge that we’ve asked everyone to contribute.”
Ms Reeves also refused to say that Labour has broken its manifesto pledge.
But she added: “I do recognise that yesterday, I have asked working people to contribute a bit more by freezing those thresholds for a further three years from 2028. I do recognise that that will mean that working people pay a bit more.”
The Resolution Foundation said the decision to extend the freeze on tax thresholds would hit lower earners, and that by 2030-31 people earning less than £35,000 a year will pay more than if the chancellor had raised the basic rate of income tax by 1p.
Sir Keir also said he was “not going to apologise” for taking 450,000 children out of poverty, as he hit back at claims that Labour’s move to abolish the two-child benefit cap had been unveiled to appease unhappy Labour MPs.
Asked whether he was axing the two-child limit for universal credit to shore up his own position, he told Sky News: “It’s impossible to argue that this is a position that has been adopted just in the last few weeks. It is my long-standing ambition.
“I’m proud to be the prime minister who has done more on child poverty than any prime minister ever.”
He also pointed to the “massive impact” the “abhorrent” Tory policy had had on the health of hundreds of thousands of children.
“I’m not going to apologise for lifting half a million children out of poverty,” Sir Keir said.
Shadow chancellor Sir Mel Stride hit out at the move, saying lifting the cap was the “wrong choice”.
