Reeves's Simplistic Thinking Spawned This Budget from Hell

One simple but sometimes useful model for judging a person’s actions and the consequences is the idea of linear thinking versus systems thinking.

Professor Google explains that “Linear thinkers view a problem as a process with a set starting point that follows a sequence of connected series, ultimately leading to a solution”.

Systems thinking, which has nothing to do with computer systems, is defined as “a way of making sense of the complexity of the world by looking at it in terms of wholes and relationships rather than by splitting it down into its parts”.

So what? Well let’s take a couple of basic examples from Rachel Reeves’s first budget:

Example 1: Putting VAT on fee-paying schools

A linear thinker would probably start with the fact that there are around 2,600 independent schools in the U.K., which educate around 615,000 children, some 7% of all British school-age children, and these schools earn about £10.2 billion in fees. So, if the Government slaps 20% VAT on these schools, the Government can expect to rake in about £2 billion a year. Though, as some parents might have to withdraw their children, it’s likely the tax take will be slightly less than £2 billion – probably nearer £1.8 billion.

A systems thinker would take the same set of basic numbers, but then would think through the consequences of imposing VAT at 20%. For example, the Office for Budget Responsibility estimates that about 35,000 children will be taken out of private education and moved to state schools as their parents can’t afford the fee increases due to the 20% VAT. So that would cut the Government’s tax take by about 6%. Additionally, local authorities have a legal duty to find school places for these 35,000 children. So there is the £7,690 annual cost of each of these 35,000 children moving to state schools – about £300 million. Plus some of these children may be in special needs schools, so the cost of moving them to state schools will be much higher than the £7,690 average cost per pupil in a state school.

Then there are other costs. For example, a child will get free school transport if he is aged eight to 11, goes to his nearest school and it’s at least two miles away, or if he is aged 11 to 16 and goes to a school two to six miles away – provided it’s one of his three nearest suitable schools. This transport may be school buses or even a daily taxi. More than £25 million was spent on school taxis by Cambridgeshire County Council in the last 12 months – an increase of almost £8 million in the space of only two years. And in Greater Manchester the council is spending more than half a million pounds every week on taxis to take children to and from school. Many schools are already full, so we can expect to have to pay for transport for some of the 35,000 extra children moving from fee-paying to state schools. That’s probably many tens of millions more in costs for the Government.

Another cost, if I understand the situation correctly, is that with schools being VAT registered, they will be able to claim back any VAT paid on capital improvements – upgrading buildings, new buildings, sports facilities and so on – done during the last 10 years. I don’t think anyone has yet worked out how much the Government will lose because of this, but it could be in the hundreds of millions of pounds.

So a systems thinking approach would suggest that Reeves’s VAT on fee-paying schools won’t give her anything near the revenue she expects.

Example 2: Changes in National Insurance

Now let’s look at a rather more weighty part of the budget.

In 2022-23 the Government raised about £177 billion from National Insurance. In the Reeves budget the employers’ rate was increased from 13.8% to 15%. That’s 1.2 percentage points – an 8.7% increase. In addition there were other significant changes such as lowering the earnings threshold at which companies pay from £9,100 to £5,000.

A linear thinker would do a simple calculation, taking the amount of National Insurance paid by employers, work out what the 8.7% increase on employer contributions and the lowered threshold would give and expect the Government’s tax take to rise by about that amount. Figures I’ve seen from the Chartered Institute of Taxation and various other reliable sources such as the Guardian newspaper and the BBC show that the Government expects an increase of between £24 billion and £26 billion from all the Budget’s changes to national insurance.

But a systems thinker would understand that many employers would not be able to afford the increase in National Insurance and would stop hiring, start shedding staff or even collapse altogether. Furthermore, many businesses might get the impression that the Government was hostile to business and just wanted to milk businesses in order to shower money on those fortunate enough to be employed in our ever-increasing, ever more costly public sector. So these businesses might become discouraged from investing in the U.K. and some might even shrink or close their U.K. operations. For example, Sir Jim Ratcliffe’s Ineos says U.K. is too “negative” as the chemicals group opts to pump $3 billion into Trump’s U.S. instead of expanding in the U.K.

Should businesses shun the U.K., this would launch the U.K. into a doom loop where the Government has made massive spending commitments and awarded generous salary increases for public sector employees but tax revenues fail to meet expectations. So the Government has to raise taxes even more. But this leads to further job losses and more companies abandoning Britain. Tax revenues decline even further while Government expenditure increases due to rising unemployment and so the doom loop of economic destruction continues. More taxes to pay for increased spending leads to less tax revenue leads to greater budget shortfall leads to more taxes dampening the economy and thus falling tax revenue and so on till the country is bankrupt and has to go to the IMF for an emergency bailout loan.

I haven’t studied Reeves’s Budget from hell in much detail. And I’m not a highly-trained economist and chess champion like Rachel from Accounts. But from the little I have seen, I get the impression that Reeves’s budget is largely based on a simplistic linear thinking approach by Rachel and her brilliant advisers at the Treasury. However, I believe that a systems thinker would have seen that the Reeves Budget was always going to be a disaster for Britain by sending the economy into a doom loop of recession and decline.

David Craig is the author of There is No Climate Crisis, available as an e-book or paperback from Amazon.