Budget 2025: Three things Rachel Reeves’s speech boils down to and two tricks the chancellor will fall back on

This is going to be a big budget – not to mention a complex budget.

It could, depending on how it lands, determine the fate of this government. And it’s hard to think of many other budgets that have been preceded by quite so much speculation, briefing, and rumour.

All of which is to say, you could be forgiven for feeling rather overwhelmed.

But in practice, what’s happening today can really be boiled down to three things.

1. Not enough growth

The first is that the Economy is not growing as fast as many people had hoped. Or, to put it another way, Britain’s productivity growth is much weaker than it once used to be.

The upshot of that is that there’s less money flowing into the exchequer in the form of tax revenues.

2. Not enough cuts

The second factor is that last year and this, the chancellor promised to make certain cuts to welfare – cuts that would have saved the government billions of pounds of spending a year.

But it has failed to implement those cuts. Put those extra billions together with the shortfall from that weaker productivity, and it’s pretty clear there is a looming hole in the public finances.

3. Not enough levers

The third thing to bear in mind is that Rachel Reeves has pledged to tie her hands in the way she responds to this fiscal hole.

She has fiscal rules that mean she can’t ignore it. She has a manifesto pledge which means she is somewhat limited in the levers she can pull to fill it.

Put it all together, and it adds up to a momentous headache for the chancellor. She needs to raise quite a lot of money and all the “easy” ways of doing it (like raising income tax rates or VAT) seem to be off the table.

So… what will she do?

Quite how she responds remains to be seen – as does the precise size of the fiscal hole. But if the rumours in Westminster are to be believed, she will fall back upon two tricks most of her predecessors have tried at various points.

First, she will deploy “fiscal drag” to squeeze extra income tax and national insurance payments out of families for the coming five years.

What this means in practice is that even though the headline rate of income tax might not go up, the amount of income we end up being taxed on will grow ever higher in the coming years.

Second, the chancellor is expected to squeeze government spending in the distant years for which she doesn’t yet need to provide detailed plans.

Together, these measures may raise somewhere in the region of £10bn. But Reeves’s big problem is that in practice she needs to raise two or three times this amount. So, how will she do that?

Most likely is that she implements a grab-bag of other tax measures: more expensive council tax for high value properties; new CGT rules; new gambling taxes and more.

No return to austerity, but an Osborne-like predicament…

If this summons up a particular memory from history, it’s precisely the same problem George Osborne faced back in 2012. He wanted to raise quite a lot of money but due to agreements with his coalition partners, he was limited in how many big taxes he could raise.

The resulting budget was, at the time at least, the single most complex budget in history. Consider: in the years between 1970 and 2010 the average UK budget contained 14 tax measures. Osborne’s 2012 budget contained a whopping 61 of them.

And not long after he delivered it, the budget started to unravel. You probably recall the pasty tax, and maybe the granny tax and the charity tax. Essentially, he was forced into a series of embarrassing U-turns. If there was a lesson, it was that trying to wodge so many money-raising measures into a single fiscal event was an accident waiting to happen.

Except that… here’s the interesting thing. In the following years, the complexity of budgets didn’t fall – it rose. Osborne broke his own complexity record the next year with the 2013 budget (73 tax measures), and then again in 2016 (86 measures). By 2020 the budget contained a staggering 103 measures. And Reeves’s own first budget, last autumn, very nearly broke this record with 94 measures.

In short, budgets have become more and more complex, chock-full of even more (often microscopic) tax measures.

In part, this is a consequence of the fact that, long ago, chancellors seem to have agreed that it would be political suicide to raise the basic rate of income tax or VAT. The consequence is that they have been forced to resort to ever smaller and fiddlier measures to make their numbers add up.

The question is whether this pattern continues. Do we end up with yet another astoundingly complex budget? Will that slew of measures backfire as they did for Osborne in 2012? And, more to the point, will they actually benefit the UK economy?