An autumn of fevered speculation. Repeated leaks of potential measures from the Treasury. Alarming warnings of a fiscal ‘black hole’.

This was the unhappy backdrop to the Budget delivered by Rachel Reeves… in 2024.

Not much change then, for this year’s outing.

Except now the economic picture is even darker – with growth forecasts down and inflation projections up – and the government is even more unpopular. For the Chancellor of the Exchequer, when it rains, it pours.

Last year the desired medicine was held to be higher public spending and increases in various taxes, alongside adherence to reasonably rigid borrowing rules. This year, Ms Reeves served up basically the same treatment, albeit with one or two different prescriptions here and there.

In the face of much criticism over the past 16 months, why is the Chancellor sticking with her preferred approach?

Explaining this requires a little background on the key challenge facing the UK.

Productivity is what ails us

In all of the thousands of words in the official Budget document, perhaps a single line is more significant than any other:

The OBR* has revised down its forecast for underlying medium-term productivity growth after it has consistently undershot its forecast.

The UK has a long-standing productivity problem. Output per worker has been close to stagnant ever since the financial crisis in 2008.

That means wages have not grown by anywhere near as much as they otherwise might. In turn, that means that tax revenues are not as high as they might have been.

Now the OBR has brought its outlook for productivity into line with more pessimistic forecasters (which include the Bank of England). This downgrade is expected to see around £16 billion per year less flow into Treasury coffers than thought by 2029-30.

So that’s the diagnosis. What about the choice of treatment?

The prescription

Last year, the Chancellor imposed £40bn of tax rises, while this year we got another £26bn or so.

Yet, at this early stage, there do not seem to be any big headline grabbers – like last year’s ‘farm tax’, or the unwise increase in employers’ National Insurance contribution. How so?

The extension of the freeze to income tax thresholds – now until 2031 rather than 2028 as previously planned – is a bigger revenue-raiser than it may appear.

While its very description is dull enough stop people paying much attention to it, this ‘stealth tax’ is expected to raise £15bn. So it accounts for the lion's share of this year’s overall rises.

This will affect almost every wage-earner (not just those who get pay rises which push them into the next band, as is often portrayed in the press). Nobody enjoys paying more tax, but it is worth bearing in mind that the Personal Allowance did almost double under the Conservative-led administrations of the 2010s. To an extent, some of that increase is merely being unwound now.

What’s more, there is an economic silver lining to the policy. Higher taxes mean less demand and less spending in the economy. That does not sound great; and indeed will act as a further drag on growth. However, the benefit is continuing downward pressure on inflation, which has dogged the economy under this government so far.

With medium-term inflation forecasts among traders in the markets having already started to fall over the past few months, this could give that push even further impetus. Lower inflation is a vital input to economic stability and, crucially, could give the Bank of England confidence to continue cutting interest rates throughout next year.

However, the situation facing the UK remains very challenging. The Budget contains no magic bullet and the OBR has downgraded its economic growth forecasts for each of the next four years, compared to their expectations in March. Inflation is still expected to be above target next year, at 2.5%, though is expected to fall back in succeeding years. Unemployment has now reached 5% and is not expected to fall back until 2027 onwards.

Budget 2025 seems to continue the course of treatment we were already on. What is welcome is that, although the general shape of the policy prescription is similar, the chosen mechanisms to raise revenue appear less damaging and distortive in places than were last year’s.

* ‘OBR’ refers to the Office for Budget Responsibility, the government’s independent economic forecaster