UK

An alternative needs-based budget

NOVEMBER 5, 2025

Özlem Onaran analyses the strengths and weaknesses of Rachel Reeves’ first Budget.

The budget marks a substantial increase in public spending, representing about 3% of GDP per year. But there are three major issues I want to highlight.

First, how will new public spending pledges affect ownership, particularly in healthcare and renewable energy? Is it going to mostly take the form of subsides and loans for private profit-making corporations instead of expanding public ownership?

There is a major issue with the new sectors of renewable energy. The government talks a lot about subsidies for carbon capture and storage. Not only is this not very green – some activists say its greenwashing – the technology is not greatly trusted. But leaving these issues aside, if it is taking the form of subsidies for expanding privately owned energy production, that’s a major issue.  Similarly there are concerns about subsidising nuclear energy.

And when it comes to health, where will the new money go? There is a lot of talk about transfers to private hospitals, which is not the kind of public sector growth I would envisage.

The second issue is about the self-imposed so-called  fiscal credibility rules: obviously it is  positive to see the gain to the economy and society coming from public investment, but this is very much limited to physical infrastructure investment which the government accepts can be funded by government borrowing. So it’s okay to borrow to build for schools and hospitals but this narrow understanding of infrastructure investment fails to recognise what feminist economists call social infrastructure  – the wages of the teachers, nurses, carers, etc., working in those school buildings or hospitals.

In our national accounts, conventional economists see these wages as day to day spending. The government is very much sticking with that conventional wisdom, and failing to recognise that we cannot  operate those schools and hospitals without those workers being paid.

Most importantly, these so called day-to-day current wage payments are actually a massive contribution to productivity. For example, evidence is now emerging that Sure Start centres have led to a more productive workforce.

So this is a major straitjacket in terms of how much the government can borrow. And while nurses and teachers have accepted their pay offers, this will not last for ever, so it was an unnecessary straitjacket to make the pledge that the government would balance its books on day-to-day spending.

Another issue I take with the fiscal credibility rules is how they define public debt. There is a welcome change to define public debt as the government’s net financial assets, financial assets minus liabilities, and taking the Bank of England out of that calculation.  This increases the area of manoeuvre in terms of government borrowing, but it’s not clear why the government is only sticking with net financial assets and thereby excluding real public assets. For example the impacts of borrowing to invest in renewable energy on the budget – they should be neutral. Because if these are publicly owned assets to invest in solar farms and wind turbines, this is going to increase the public assets in real physical infrastructure. There is some unnecessary fiscal conservatism there.

My third big concern, which Richard Burgon MP has campaigned around, is that the proposals for taxing wealth in this budget are way too modest. Similar to Richard’s petition, we have formulated another progressive wealth tax proposal for Unite the Union who have moved a motion and won approval for it at the TUC Congress.

It proposes a progressive net wealth tax that taxes the top 1% of the wealthiest households. It would affect an individual who has net wealth of above £2.2 million (the top 1%): they would be taxed at a marginal rate of 1%. It is progressive – if you were in the top 0.5% , owning wealth above £3.6 million, you would be taxed at a marginal rate of 2%; and for those with net wealth above £11.2 million (the top 0.1%) they will pay a marginal rate of 4% on their wealth exceeding £11.2 million.

Even if the wealthy use all their creative accountants to avoid half of the tax they have to pay , it would raise £46 billion, £69bn if 25% is avoided, and £78 billion if 15% of the tax is avoided.

Just to put this in context, Rachel Reeves’ budget, which has been celebrated as a massive ‘tax and spend’ budget is planning to raise just an increase of £40 billion in taxes.  So that would be a massive increase in tax revenues.

We also propose for simplicity an alternative flat tax rate of 1% on the top 1% wealthiest individuals (a household with wealth above £4.01m). This would raise, in the most pessimistic scenario of  50% tax avoidance, £17bn, £25bn, if 25% avoided, or £28bn, if 15% avoided.

All the celebrated changes to Capital Gains Tax and tax on private equity managers’ performance fees (carried interest) will mean an increase there, but not even as much as expected by the managers themselves! One private equity manager said, “I don’t usually drink but I went out to celebrate after the announcement!” An increase from 28% to 32% on “carried interest” is ridiculous given that the top marginal income tax rate is 45% if you are earning above £125,140. Similarly Capital Gains Tax could have gone much further with the potential to have raised up to £15.2bn a year, instead of the estimated £2.49bn by 2029/30, if it were aligned with the top marginal income tax.

Reforming business and agriculture relief in inheritance tax further could have brought in up to £1.4bn.

And there were missed reforms to National Insurance too: extending it to investment income and abolishing the upper earnings limit.

There was nothing on universities in the Budget announcement and the tuition fee rise  announced subsequently, five days later, is exactly what I feared was coming.  It’s very bad news: the average student has about £50,000 of debt when they graduate and will find it very difficult to get a mortgage with that level of debt, without family support, and it will just deepen the level of inequality in terms of wealth and living standards as well as access to higher education. Tuition fees should have been scrapped and funding for education could have been financed by a progressive tax on the wealth of the top 1%.

Budget settlements for the departments for health, local government and education also need to include additional funding to meet the cost of paying the higher minimum wage for workers in vital low paid roles – early education, childcare and social care as well as the higher employer contribution to National Insurance.  

I welcome the increase in the minimum wage but I actually think it is not enough and needs to be increased gradually to reach the level of a Living Wage. Currently, it does not match the cost of living increases faced by low paid workers.

The additional £600 million of funding to local authorities to support social care will also likely not be enough to compensate for years of underfunding or for the increase in the minimum wage and national insurance contributions. This lack of social care funding will continue to put pressures on the NHS and leave unmet needs in the community. It will be women picking up the care – unpaid, impacting their own health and access to the paid labour market. This both deepens gender inequality and is economically inefficient.

There is a £1.8bn commitment to fund the much-needed expansion in early education and childcare. But Women’s Budget Group is concerned that there is still a gap in funding for the hours promised to parents as ‘free’ and the cost to providers of delivering them, particularly for three and four year olds.

The continued freezing of fuel duty is the opposite of what’s needed !We need to drastically reduce car use.

The 1.7% uplift in benefits  is less than the 2.6% expected rate of inflation for 2025. So the cost-of-living crisis continues and is deepening for people on benefits.

And there is nothing about undoing some of the punitive measures introduced since 2010: the two-child limit, the benefit cap and the sanctions.

If we do the right thing, socially necessary sectors will grow – health, education, the green economy, energy efficiency, renewable energy, public transport and social housing. At the same time, we have to de-grow some socially harmful sectors substantially. For example, why do we not scrap Trident?

My proposal would be to start with the needs that we have. Education from cradle to grave, including further and higher education, is one of the things I see as essential, particularly in the age of Artificial Intelligence. If we are to share the fruits of technological change, we need access to higher and further education if people choose it. And while I can see the need for expanding prison funding today, improving both the working conditions as well as the conditions of the prisoners and giving them the opportunities for personal development, if we invest in a properly funded education system from cradle to grave we would probably need fewer prisons in the longer run. I would love to  see a future where we can turn some of our prison buildings into training and culture centres or centres for early childhood education.

Özlem Onaran Is Professor of Economics, Co-Director of Institute of Political Economy, Governance, Finance and Accountability and Associate Head of the School of Accounting, Finance & Economics – Research and Knowledge Exchange at the University of Greenwich. This article is an edited version of contributions she made to an online Budge Review panel meeting on Monday November 4th, organised by Arise – a Festival of Left Ideas, the full video of which is here.

Image: https://www.freemalaysiatoday.com/category/business/2024/10/31/uks-labour-govt-hikes-taxes-in-first-budget/ Licence: Attribution 4.0 International CC BY 4.0