Source: Based on an analysis from ITV News on the Autumn Budget and Chancellor Rachel Reeves’ strategy.
Chancellor Rachel Reeves is navigating a significant political storm, facing strong public disapproval despite a landslide election victory just 16 months ago. The core of her struggle, according to analysis, is a perceived disconnect between her election-era promises and the fiscal reality of her first budget—a reality some economists characterize as “a bad hand played in truth pretty poorly.”
The Political-Economic Disconnect
Reeves’ political strategy has relied on blaming her predecessors, specifically citing 15 years of weak economic growth, the instability caused by Brexit, and the lasting damage inflicted by Liz Truss’s mini-budget. However, the analysis highlights that several of her key problems are self-inflicted, stemming from a crucial initial mistake: adopting the previous Conservative government’s “fiction” of unfunded spending plans.
Before the election, the Chancellor committed to a “tax lock”—a promise not to increase National Insurance (NI), basic/higher/additional income tax rates, or VAT. This constraint, while politically expedient, has since “warped” her major fiscal decisions, forcing her to find revenue elsewhere and leading to measures widely seen as economically inefficient. This commitment created an environment where fixing the country’s public finances required politically difficult choices, eroding public trust after she had previously vowed against “more borrowing or more taxes.”
Direct Impact on Business: The Employer NI Hike
In an effort to avoid breaching the manifesto tax lock, the Chancellor chose a highly damaging revenue stream: increasing Employer National Insurance (NI) and lowering the threshold at which it takes effect. This change was designed to raise £25 billion annually, but its method of implementation has had significant and negative consequences for the business community:
- Squeezed Profit Margins: The tax is paid by businesses for their workers, functioning as a direct tax on employment. This immediately cuts into company profits, reducing capital available for investment, expansion, or wage growth.
- Job Market Distortion: The combined effect of the Employer NI hike, the lowered threshold, and the steep rise in the National Minimum Wage is credibly argued to have destroyed part-time and entry-level jobs. It raised the cost of employment significantly for the most vulnerable sectors of the workforce.
- Inflationary Pressure: The increased cost of labor for businesses is typically passed on, either through higher prices or reduced wages. The analysis suggests these factors have contributed to pushing up inflation and making public services—which rely heavily on labour—more expensive to deliver.
- Lost Revenue: Critically, the analysis indicates that around one-third of the expected £25 billion revenue has been lost through these negative economic feedback loops: lower wages, depressed profits, fewer jobs, and higher welfare bills.
Economists argued that the alternative—reversing the prior government’s NI cuts or simply raising income tax—would have been significantly less economically damaging but would have required breaching the sacred tax lock pledge.
Consequence of Policy U-Turns
The government’s instability was further highlighted by its handling of welfare reform. Attempts to cut costs by targeting winter fuel payments and rushing an accelerated review of disability benefits (PIP) proved politically disastrous. Both initiatives triggered a revolt among Labour MPs and led to rapid U-turns, causing the government to appear weak and incompetent while failing to secure the desperately needed savings.
Furthermore, by leaving an insufficient £10 billion “headroom” (financial buffer) in her first budget, the Chancellor set herself up for failure. An expected downgrade from the Office for Budget Responsibility (OBR) on trend productivity growth will now crash straight through that buffer, forcing the government to find further significant tax rises to simply restore stability.
The conclusion is that while the economic hand dealt to the Chancellor was difficult, the commitment to a rigid political promise (the tax lock) led to fiscally complex and economically harmful choices that have ultimately eroded confidence in her leadership, leaving the UK with high debt, anemic growth prospects, and borrowing costs highest in the G7.
