Rachel Reeves promised businesses time and time again before the election that she was on their side.
As part of her Mais Lecture last year, the then-shadow chancellor promised a partnership between “dynamic business and strategic government”.
Not only did she vow “to mobilise all of Britain’s resources in pursuit of shared prosperity” but she also offered “stability too in the tax system”.
However, it didn’t take long for her promises to unravel, as the Chancellor used her maiden Budget to hammer companies with a £25bn National Insurance tax raid – using the proceeds to help fund a public sector hiring spree.
While this may have mobilised one part of the economy, it may not be what private sector bosses were expecting when listening to Ms Reeves’s speech last year.
In a stinging rebuke to Reeves’s entire economic philosophy on Thursday, the Bank of England highlighted how the growing public workforce is draining productivity.
Rachel Reeves promised businesses time and time again before the election that she was on their side.
As part of her Mais Lecture last year, the then-shadow chancellor promised a partnership between “dynamic business and strategic government”.
Not only did she vow “to mobilise all of Britain’s resources in pursuit of shared prosperity” but she also offered “stability too in the tax system”.
However, it didn’t take long for her promises to unravel, as the Chancellor used her maiden Budget to hammer companies with a £25bn National Insurance tax raid – using the proceeds to help fund a public sector hiring spree.
While this may have mobilised one part of the economy, it may not be what private sector bosses were expecting when listening to Ms Reeves’s speech last year.
In a stinging rebuke to Reeves’s entire economic philosophy on Thursday, the Bank of England highlighted how the growing public workforce is draining productivity.
In particular, the shock of the £25bn increase in employer National Insurance contributions has demolished bosses’ confidence.
Businesses had wrongly believed Labour’s manifesto pledge of no National Insurance tax hikes applied to them, meaning many were stunned by October’s Budget.
Most bosses surveyed by the Bank expect to cover some of that cost by employing fewer staff and raising prices, while a significant chunk plan to offer workers smaller pay rises to offset the tax bill.
The Bank of England’s analysis indicates the blow from the NICs tax raid will fall most heavily on low-paid workers, and particularly those in consumer-facing jobs.
It expects unemployment to rise from 4.4pc at the end of last year to 4.8pc in 2027, dealing a blow to the Chancellor’s plans to get more people into work.
The simultaneous jump in the minimum wage is also poised to make hiring workers much more expensive.
The recent gloom sparked by the Budget has led to businesses warning the Bank that they will reduce investment, which further harms future growth prospects and stifles a revival in productivity.
Business investment may have been higher in 2024 than the Bank had anticipated, but it has since cut its forecasts for this year and the following two.
This all contributes to lower GDP growth. The Bank believes the economy avoided a recession by the skin of its teeth over winter, while Andrew Bailey, the Governor, also confirmed a drastic reduction in Britain’s growth forecasts on Thursday, from 1.5pc to 0.75pc.
However, Bailey himself stressed that this was not just because of the Budget, as he pinned some of the blame on productivity.
He said: “On the growth forecast, it is not a judgement on the Budget. The judgement really is that growth has been flat, as measured, since the spring of last year.
“It has left us with quite a few puzzles as to what is going on, particularly because of the way the increase in population will come though and what effect that has.
“We have got more population, we have got more labour force and we have got the same output, so you can only conclude then that you have got lower productivity.”
Similarly, the Governor is not entirely opposed to Reeves’s plans for the economy.
Bailey went out of his way to praise the long-term agenda set out by the Chancellor last week, including her bid to expand airports and build more homes.
He said: “I am a very, very strong supporter both of the growth agenda this Government has, and by the way of the growth agenda the previous government had as well.
“The potential growth rate in the UK has been low since the financial crisis. Addressing those questions is critical. I very strongly agree with the Chancellor on this point.”
The danger is that those plans will take years to come off.
“Structural policies take time to come through,” said Mr Bailey. “When we are looking at a two- to three-year horizon here you would not expect a lot of that to come through quickly.
“But I don’t for a moment want to leave you with the thought that therefore it doesn’t matter – it does matter.”
It leaves the Chancellor –and, more importantly, the rest of us – facing the prospect of a middling economy for years to come as the cost of higher taxes and a bloated public sector hit home.
