Budget 2025: Hyperactive Incrementalism and the Missing Long View

PATRICK DIAMOND, DAVE RICHARDS, DARCY LUKE, SAM WARNER AND ANDY WESTWOOD

The road into this year’s Budget has been turbulent and the road out looks no smoother. This is only the second Budget of Rachel Reeves as Chancellor, yet the fiscal backdrop had already darkened considerably in the eighteen months Labour has been in power. The Office for Budget Responsibility (OBR) remained relatively – and perhaps surprisingly – benign in its forecasts leaving very little room for manoeuvre. Worse they later admitted that there were no measures that they could score into their growth forecasts. Likewise with productivity where downgraded estimates remain a fundamental problem for a government whose number one mission is economic growth.

Last year’s Budget identified a £22bn black hole and paired higher NHS and infrastructure spending with an unexpected 2p rise in employers’ national insurance – a decision that still reverberates politically. Twelve months on, the hole is deeper. Elusive growth, persistent external shocks – from Trump’s tariffs to international wars and geo-political conflict – and the legacy of unfunded commitments left by previous governments continues to reverberate. Spending on defence, prisons, asylum, schools (especially Special Educational Needs and Disabilities) all add to the pressures, yet the OBR’s earlier optimism on productivity has evaporated much to the chagrin of the Chancellor. The unaffordability of reductions in National Insurance (NI) enacted when Jeremy Hunt was Chancellor is now plain. So, Reeves had little choice but to raise taxes, even if many have been deferred, to enable her to stick to planned levels of spending and investment, while creating a larger fiscal buffer to cope with future uncertainty.

Fiscal Strategy: Hyperactive Incrementalism Without Anchors

Yet meeting these costs has already tested bond market tolerance. Hopes of trading manifesto promises for an income tax rise and NI cut were abandoned. Instead, the Budget offers a “smorgasbord” of measures – but more akin to an I’m a Celebrity ‘Bushtucker trial’ than the type you’d find in Sweden. New taxes on electric vehicles, houses worth over £2m, gambling, and vaping, together with reduced NI exemptions for pensions, and most of all, the freezing of individual tax thresholds for a further three years after 2028. Consequently, taxes in the UK as a share of national income will reach their highest level ever.

Most bewildering to outside observers will be the glaring absence of any long-term economic strategy for growth and investment.  It reveals what we have previously identified as a hyperactive incrementalist mindset endemic within the British state. So, while some measures masquerade as longer term reforms – tidying up pensions, property and transport taxes (that the Treasury likes) – the reality is this Government, like ones in the recent past, is simply layering on short‑term fixes that lack coherence. Those losing out will protest loudly, but the deeper issue is the absence of a stable, long‑term fiscal plan.

Growth Measures: Desperation Over Design

Boosting growth remains the Government’s declared mission. The Budget effectively doubles down on their existing approach – the industrial strategy and its focus on eight sectors and a mix of infrastructure investment, planning reform and deregulation. A great deal rests on the adoption of AI in both business and the public sector. But many additional Budget measures focus on growth in city regions to ‘balance regional inequality’ – an essential but stubborn, long-term challenge for the UK. This pick‑and‑mix of regional growth funds, place pilots and eligibility for integrated settlements remain centrally determined, not locally driven, and are just more evidence of pervasive hyper-incrementalism. Spending allocations are rolled out from the centre, with little prospect of serious institutional reform and in the absence of meaningful, promised, but undelivered decentralisation and constitutional change. Even the promise to allow regional mayors to introduce a tourist tax – though welcome – represents the smallest of steps towards more significant levels of fiscal devolution seen elsewhere in the OECD. Elsewhere there is more familiar centralisation with local authorities waiting to hear which of them will qualify for new funds to repair 200 playgrounds.

Meanwhile, contradictions abound. Science and technology are championed as drivers of growth including in our regions and industrial strategy sectors, yet universities face the imposition of a new tax on international students, undermining the very research base that UK science and innovation relies upon.

Political Short-Termism: Competence But Without Vision

Politically, the Budget’s strategy of delaying tax rises hinges on the state delivering more with less –an ambition that will require substantial reductions in headcounts and significant savings across national and local government over the spending review period if it is to be realised. This is the opposite of deferred gratification: many of the tax rises are backloaded to the latter years of the Parliament, closer to the next General Election. It is a high‑stakes strategy. Should economic growth and productivity gains remain elusive, the approach risks storing up significant electoral trouble.  Reeves and Starmer are banking on their strategy delivering growth within this Parliament and outperforming OBR forecasts. At the 2024 Party Conference, Rachel Reeves declared: “We will fix the foundations of our economy and change it for the better – building growth that works for working people.” Yet the long‑term vision for institutional change and economic reform remains unclear, leaving the Government’s current optimism looking unwarranted. Public and media hostility is unlikely to soften. Competence is essential but rarely sufficient to sustain political and market confidence. This is sticking‑plaster economics – hoping external conditions become sufficiently benign that structural weaknesses can be concealed and difficult decisions avoided.

How to Break the Doom Loop

So, is there a viable alternative economic agenda? With nearly four years remaining in this Parliament and a substantial working majority, there is scope to break free from the doom loop of short‑term fixes. Achieving this, however, demands a radical recasting of strategic direction and a greater willingness to embrace calculated risks. That will itself entail:

• Allocating more resources to the Industrial Strategy and to places most likely to grow: that means further prioritising resources for the sectors and investments most likely.
• Accelerate and deepen devolution: Build institutions and capacity within strategic authorities to drive economic development. Empower regions to take greater control over investment in growth‑enhancing infrastructure – such as public transport and digital networks – alongside key assets like research and innovation, skills, and human capital.
• Recast fiscal rules: Create space for sustained long‑term investment in places and growth. While the Government has pledged an additional £130 billion of public sector investment, the backlog remains vast after decades of neglect of the public realm.
• Commit to institutional reform: Go beyond incremental adjustments to entrench a durable, long‑term framework for growth and productivity. Such reform should give both public and private sectors the confidence to invest, while incentivising innovation.

Without the right ingredients for growth and innovation – within both business and government – the UK risks drifting into successive Budgets that will be characterised by turbulence and incrementalism, rather than by a coherent strategy to drive economic revival and raise living standards nationwide. The risks of economic and political failure are mounting.

Image courtesy of House of Commons Flickr.