Tax burden to rise to historic highs after Labour’s first Budget, OBR says
The new government’s first Budget will see the tax take rise to its highest ever level, the Office for Budget Responsibility (OBR) said today.
Rachel Reeves unveiled tax rises worth £40bn in Labour’s first Budget, helping to fund a big increase in public spending, while the Chancellor also raised borrowing significantly.
“This budget delivers one of the largest increases in spending, tax and borrowing of any fiscal event in history,” Richard Hughes, chair of the OBR said following the Budget.
In its latest economic forecasts, published alongside the Budget, the independent fiscal watchdog forecast that the state would expand to 44 per cent of GDP, almost five percentage points bigger than it was before the pandemic.
About half of the planned increase in public spending will be funded by higher taxes, most notably the big increase in employers’ national insurance.
This will push the tax intake to 38 per cent of GDP by the end of the decade, its highest level on record.
The rest of the increase in public spending will be financed by higher borrowing. Budget policies will mean borrowing increases by an average of £32bn over the next five years, the OBR said.
Growth would see a “temporary boost” as a result of policies announced in the Budget, although this would fade in the medium term due to crowding-out.
Crowding-out describes when increased government spending leads to a decrease in private sector activity.
“The increase in the public sector’s use of resources in an economy close to its potential level of output leads to the crowding-out of some business investment,” Hughes said.
“The net effect of all these changes is to leave the level of GDP higher in the near term, but broadly unchanged at the medium term,” he added.
Looking at the long term, the OBR suggested that a “sustained” increase in public investment beyond the five-year forecast period would help improve the UK’s growth outlook.
Hughes said that the net effect of the government’s policies would “turn positive in the early 2030s as the lagged impact of a larger public capital stock feeds through into potential output”.
However, inflation will also be higher than it otherwise would have been as a result of the Budget, which may force the Bank of England to hold interest rates higher for longer.
The OBR’s March forecasts suggested inflation would fall below two per cent next year, remaining below the Bank’s target for the duration of the forecast period.
Its latest forecasts suggest inflation will remain above two per cent until 2029.
David Miles, a member of the OBR’s Budget Responsibility Committee, said the spending increases “push the economy…a little into the territory of demand running a bit ahead of supply capacity”.