Time to be bold: how the budget could set the UK on a more hopeful course

As the cost of living crisis continues and economic growth remains sluggish, the chancellor finds herself in a difficult position ahead of the this week’s budget. The only way the government can address the multiple crises it faces is to take bold action this budget but it must also level with the public about the challenges ahead. Increases in day-to-day spending provided in the previous budget will not be sufficient to repair damages from austerity, let alone improve service provision. In 2028/​29, day-to-day per capita resources in some departments will be lower than in 2009/​10, while people across the country are worried about being able to heat their homes this winter.

Meanwhile, slower, longer-term challenges are beginning to bite as the population ages. Healthcare spending made up 14% of total public sector spending in 2000/​01, but this rose to 19% in 2024/​25. All these challenges mean the goal for this budget must go beyond finding money to restore headroom. The chancellor must have the courage to put the country on a more sustainable path and help break us out of economic stagnation.

The government was wrong to box itself in so tightly on tax, but continuing to bury its head in the sand won’t help the party or the country long-term and it’s clear it will suffer at the electoral box if it fails to revive public services and tackle the cost of living crisis. To set the country on a better economic course the following steps must be taken.

Taxing wealth fairly

First, the government must be honest that taxes need to go up, and that this is necessary to deliver quality public services and to address the fiscal pressures from an ageing population. Households up and down the country are currently struggling to make ends meet, so it would be inexcusable to put up taxes for ordinary people without first ensuring the wealthiest shoulder costs as much as possible. Changes should include equalising capital gains tax and income tax (accompanied by other necessary reforms such as taking inflation into account and removing the capital gains tax uplift at death), abolishing the residence nil-rate band within inheritance tax, and increasing the basic rate of dividend tax. Property taxation is also in desperate need of reform, and the government should commit to building the administrative capacity and data to successfully tax different types of wealth.

The OBR estimates that health spending will rise by an additional 6.6% of GDP by the mid 2070s, and state pension spending will rise by 2.7% of GDP. While we obviously don’t need to raise all this money today, it is the direction of travel. It’s clear, wealth taxes realistically won’t cover this. Taxes on ​“ordinary people” will eventually have to go up as progressively as possible, and all political parties should start being honest about this (although the triple lock should also be reviewed). At this budget, the government should acknowledge these longer-term pressures as well as stop making promises it can’t keep. They cannot build credibility without this.

We know from George Osborne’s efforts that austerity struggles to bring down the debt and stalls the economy, but where there are sensible savings these should obviously be pursued. A clear candidate to free up funds (around £18.8bn per year – although only £4.8bn of this would count towards the headroom) for government priorities must be renegotiating the agreement that sees the Treasury pay for the Bank of England’s losses from quantitative easing. The US Federal Reserve and European Central Bank absorb their own losses via ​‘deferred asset’ and ​‘losses carried forward’ accounting. It’s untenable to raise taxes whilst allowing needless transfers to the central bank that don’t happen in other countries.

Rethinking the fiscal rules

Supporting investment and productivityis vital to getting the UK out of its current economic slump and to meeting the challenges of an aging population. But to achieve this, the government must reassess its fiscal framework. The current distinction between day-to-day spending and investment is not always helpful. Some investment spending does little to boost growth, while some day-to-day spending, such as that on education and skills, can boost the UK’s long-term productive capacity. This is why NEF has called on the OBR to move away from a one-size-fits-all approach to estimating the impact of government spending and investment on GDP, and instead adopt a more flexible and context-sensitive model inspired by International Monetary Fund (IMF) practices.

The fiscal rule to reduce debt as a percentage of GDP by 2029/​30 also needs to be re-examined. A government cannot implement deep economic renewal over this short time period, and the benefits from some vital investment will take longer to materialise. Moreover, fiscal space is determined by a more complex set of macroeconomic dynamics than simple ratios between parts of the government’s balance sheet and the nation’s GDP. This is why NEF argues that fiscal rules should be replaced with ​“fiscal referees”, an independent committee at the OBR who members could scrutinise and feedback on the fiscal pros and cons of government plans.

A fiscal referees approach would also mean that the quantity of taxes and borrowing are determined by the size of the state the country requires. We shouldn’t be putting up taxes because of arbitrary fiscal rules – we should be doing it because public services are underfunded. Given the emphasis that the chancellor has put on her fiscal rules, they are now intrinsically tied up with her credibility. But they were never the right goal posts.

Cost of living action

Finally, the government must take further action, both short-term and medium term to tackle the cost of living crisis. A better way to distribute where high energy costs fall would be a National Energy Guarantee. And to bring down costs in the medium term, the government should ask the Bankto consider, as the Japanese, Singaporean, Chinese, Hungarian, Malaysian, Indian, and Bangladeshi central banks do, supporting investment in key sectors, like energy, via special lower rate lending programmes. Such an initiative would also help the Bank meet its price stability mandate in the medium term.

Rachel Reeves has had a rocky year, but it is not too late to turn things around if she has a viable plan and the courage to see things through. Rumours that she will instead pursue a ​“smorgasbord” approach are not encouraging. The UK’s current economic situation requires vision and boldness, not constant tinkering. The measures laid out above, while tough in places, could set the UK on a more realistic and hopeful course.

Image: Kirsty O’Connor /​Treasury