Chancellor Rachel Reeves has unveiled a budget that will be remembered for its high-stakes, 'live now, pay later' approach, a package that provides immediate political breathing space for the Labour government while deferring significant financial pain for voters and the economy.
A Chaotic Buildup and a Combative Defence
The chancellor's big day was marred by a shambolic prelude, with damaging leaks and counter-leaks emerging from the Treasury. The chaos culminated in the Office for Budget Responsibility releasing its forecasts ahead of schedule, allowing pundits to dissect the measures before Reeves had even announced them in the Commons.
Despite this embarrassment, the chancellor delivered a combative performance, fiercely defending her policy choices and launching a robust attack on the Conservative record in office between 2010 and 2024. In this, she was significantly aided by the still-vivid public memory of Liz Truss's mini-budget from three years ago, an event that continues to haunt the Tories and benefit Labour.
The Fiscal Tightrope: Breathing Space vs. Future Pain
Against low expectations, the budget managed to provide the government with some much-needed room to manoeuvre. Contrary to dire predictions of gaping black holes in the public finances, the OBR's forecasts were less severe than many in the City had feared.
The heavily trailed 2p rise in the basic rate of income tax was avoided. Instead, through a combination of other measures, Reeves has more than doubled the government's fiscal headroom to £22 billion, creating a larger buffer against unexpected bad economic news.
However, this breathing space comes with a major caveat. The budget is fundamentally structured on a 'jam today, pain tomorrow' model. Spending increases are front-loaded, offering short-term relief, while the higher taxes are back-loaded, scheduled to kick in closer to the next election. This has sparked scepticism in financial markets, with analysts questioning the government's long-term commitment to fiscal discipline.
The Voter and Market Conundrum
Reeves faces the immense challenge of keeping two critical audiences happy: voters and the financial markets. The strategy of freezing rail fares, cutting energy bills, and increasing the minimum wage is designed to buy time and public goodwill.
The chancellor is likely hoping these measures will help reduce inflation, potentially encouraging the Bank of England to accelerate interest rate cuts. However, there are two significant flaws in this approach.
Firstly, the immediate giveaways are far more modest than the eventual tax increases that are planned. Critically, these future tax rises will impact even low-income workers. A full-time worker on the minimum wage will pay an extra £137 per year by 2030 due to the extended freeze on income tax thresholds.
Secondly, there is no guarantee the Bank of England will play along with faster rate cuts, nor that the markets will maintain their current level of faith in the chancellor's plans.
Banking on Growth Without a Clear Plan
The government's rhetoric is filled with promises of 'turbo-charging' economic growth, which would indeed solve many of its fiscal dilemmas by raising tax receipts and reducing the deficit. Yet the budget contained no major new supply-side measures designed to genuinely boost the UK's long-term growth potential.
This leaves Reeves in a precarious position, essentially hoping for an unforeseen economic upturn. She aspires for this budget to mirror the political turning point that Geoffrey Howe's infamous 1981 budget provided for Margaret Thatcher's then-unpopular government.
However, the parallels are limited. Howe could announce an immediate two percentage-point cut in interest rates, an option not available to an independent Bank of England today. Furthermore, a Falklands War-style event to dramatically boost government popularity is unlikely to be repeated.
For now, the chancellor can only sit tight and hope her gamble pays off. The future of the Labour government may hinge on whether 'later' arrives gently or with a devastating crunch.
