There is a danger of over-thinking Britain's current economic dilemma. In simple terms, the revealed preference of UK MPs of all parties for about 25 years has been to increase taxes on business, and higher income savers and employees - predominantly to expand social spending.
This is the more-or-less stated policy of Labour, the SNP, the Greens, Plaid and the LibDems. It has also been the revealed policy of the Tories after Covid - a once in 80 year event, which massively increased UK debt. We have cumulatively created incentives towards a high-welfare, low-skill economy, with falling GDP-per capita, funded by taxes and very high government borrowing. No conceivable Labour Prime Minister currently has a mandate from their MPs to significantly change this direction. The UK's financial challenges will thus have huge implications for transport.
Social spending and taxes at 80 year high
We now live in a country where 6.5m people (around 8% of the population) are on permanent sickness and unemployment benefits, and where c 20% of the working age population of significant urban areas as varied as Bradford, Birmingham and Blackpool are not in paid employment (1). The cost of the growing cohort of pensioners and in-work benefit claimants is on top. We are already in a GDP-per capita recession, as the population surges and income stagnates. Annual state spending is 5% higher than tax income, and HMG must borrow to fund the gap, so that UK post-lockdown debt is approaching 100% of GDP. None of these trends began in July 2024.
Since 2023 tax rates have been raised – amongst others - on electric car drivers, home owners, savers, pension savers, investors, business profits, family businesses, dividends, capital gains, higher income employees, gamblers, and tourists. The leaked OBR report suggests the total tax increase of the 2025 package is around 26 billion GBP by 2029, taking tax-to-GDP to an all-time high approaching 40%.
I see two immediate issues for transport:
1. Will the large tax rate hikes actually raise the hoped-for revenue? All of us who have ever had responsibility for bus or rail fare changes understand this 'elasticity' uncertainty - if we change fare levels, how will passengers react ? It's the same problem for the Chancellor. She's increased lots of tax rates, but what will be the real-world behavioural response ? How many individuals and businesses will now defer capital gains, reduce their working hours, cut business headcount etc or - worst case scenario - leave the country to lower-tax jurisdictions ? This will take time to play out, but there will be fairly immediate, and visible, cash flow effects in government tax take within months.
2. Will any of the budgetary angst subdue the public sector's desire for more spending? I doubt it. If spending keeps pushing ahead of government income, then the borrowing requirement rises as early as the summer. Labour MPs, in general, do not believe that their primary mission is to keep a beady eye on public spending. Within 'transport world' I meet very few officials who currently think that their central mission is to reduce public sector budgets and debt. Just think of the funding situation facing Network Rail, the various "Transport fors", HS2 etc, from pay demands, sector inflation, net zero and general inflation. We will all know that "times really is 'ard" when, say, Andy Burnham volunteers his proposals to reduce TfGM's deficit. This still seems a rather low probability event.
The biggest pressure arises from the constant growth in NHS and social benefit outflows, which now account for c45% of UKG spending, vs just 5% for transport and 9% on debt interest. This 8 to 1 ratio is crowding out all other areas of spending. In the grubby world beyond political commentary, there is a cash trade-off between expanded social spending and (say) electrifying local railways in northern England.
Tax policy is not obviously aligned with Government's high level objectives
The defining idea of the 2024 and 2025 budgets is the notion that corporate and consumer behaviour is somehow inversely correlated to financial incentives. So we have a Government whose stated policy is to prioritise growth and reduce environmental harm, but which has increased taxes on savings and investment capital, and reduced (again) fuel duty. Large increases in rail wages are accompanied by a further increase in rail operating subsidies to suppress rail fares.
There were some sensible things in the budget. HMG is at last being honest that motorists who drive electric vehicles (EVs) will have to contribute towards both the upkeep of the highway network, and general taxation (ie that large part of fuel taxes that goes into 'elfansocialsecuridee'). The 'environmental' incentive for EVs would logically be met by increasing fuel taxation – whereas HMT have once again mandated the opposite (with a rise supposedly pencilled -n from autumn 2026)
There was notably nothing much here to encourage UK retail savers or pension funds to invest in transport or the energy transition.
"Retail" offers, such as freezing some rail fares, only entrench the idea that it is the Government's role to directly manage prices and incomes - another policy of the 60s and 70s that delivered notably poor results. We are not far off Keir Starmer, or his successor, personally signing off the Island Line budget, and agreeing the annual bonus for the Senior Railman at Sandown, before deciding if there's enough money left for replacement door bearings at the next D Stock maintenance exam.
Bond market sentiment is important, given high levels of UK borrowing
The crucial message of this budget, for the investor audience, is that the budget deficit - ie the excess of Government spending over its tax income - is forecast to fall from c 5 % to c 2% by 2030.
If bond markets don't believe this, and the budget gets a raspberry from investors, expect the interest rate payable on UK government debt to spike up. HM Treasury may then be
forced into demanding emergency departmental budget cuts as early as the summer of 2026. Then, all hell will break loose. Labour's allies in the unions, local government and special interest lobby groups will push back hard, and Labour backbenchers are likely to align with them, on the basis that they have nothing to lose, given current, miserable, opinion polling. The LibDems, SNP and other parties representing the sectional interests of the twee middle-class, will surely also vote to resist cuts, in any such stand-off.
I therefore predict a reasonable chance of a Golden Jubilee replay of Labour's 1976 emergency budget sometime this summer or autumn, with abrupt cuts to capital spending as the least-worst way of staunching the forecast cash outflow quickly. This would mean 'pausing' large rail schemes, light rail projects and so on, and could perhaps force GB Railways to begin its life presiding over service cuts. Taking back control, also means taking budgetary responsibility.
Cutting spending on high value capital projects to fund a surging welfare bill would further damage the UK's feeble trend rate of growth, but is politically realistic, given MPs' revealed policy preferences. This could encourage a return to PPP/PFI type structures, probably under a new name, to unlock private finance of capital assets, while tax revenues are diverted into yet more current spending on health and welfare.
The worst case scenario is that backbenchers threaten to vote down any material attempt at spending controls. At that point the UK Government might be forced, by convention, into calling an early General Election. France has been in a similar situation for almost two years, with no agreement on a budgetary way forward, but no prospect either of a fresh election. The French benefit from the implicit guarantee provided by the EU's single currency, and the unstated expectation that German and other EU taxpayers will ultimately be forced to pay for French railway workers' pensions. No such pathway is open to Britain.
Round III set for autumn 2026
The most likely outcome is probably a third, successive large-scale tax-raising budget in the autumn 2026, possibly under a new Labour leader and chancellor. Installing a fresh PM from Labour's 'soft left' would be a further signal that Parliament's preference is to double-down on the current policy of growing spending and raising taxes, until someone - either the voters, or the financial markets from whence the Government seeks to borrow - calls a halt.
(1) data from OBR Office of Budgetary Responsibility / HM Treasury
David Leeder is Managing Partner of transport strategy consultancy TIL Transport Investment Ltd, and a former main board director of FirstGroup plc and CEO of West Midlands Travel
