Onward’s Response to the 2025/26 Budget

Director’s Comment

“Today’s Budget compounds the damage inflicted a year ago: slower growth and lower productivity alongside higher taxes and more welfare spending. It outlines huge tax rises, choosing to extend the freeze on income tax thresholds, increase taxes on dividends, savings and property income, and tighten the rules on salary sacrifice pension schemes.

“The OBR now expects that by 2030 around one in four adults will be higher or additional rate taxpayers, compared with fewer than one in six in 2021. Yet welfare spending continues to rise, without measures to lift employment, skills or business investment to pay for it while higher earners flee.

“Once again, the biggest tax rises and savings are pushed into 2028-29 and 2029-30, even without further damaging measures like the Employment Rights Bill being scored for their impact on jobs and growth. The risk is that the UK drifts further into a high tax, low growth, high welfare equilibrium, rather than using this Budget to set out a credible long term plan to raise productivity, support work and make the tax system more clearly pro growth.”

Director of Onward, Sir Simon Clarke

Productivity 

Britain is in a fiscal hole for several reasons. One major reason the Chancellor is having to raise tax is because Britain’s productivity forecast –  estimating the future size of the economy – has been downgraded to 0.3 percentage points lower than in March. Poor productivity not only means higher taxes, it also means low growth and flatlining living standards for workers and families.

With sky-high energy costs, stifling planning restrictions, and the rapid offshoring of our most productive industries, Britain’s growth outlook is bleak. Boosting productivity is the key to unlock faster growth, higher real wages and stronger tax revenue, but so far almost no pro-growth measures have actually been delivered by this government.

Taxation 

In 1991, less than 4% of taxpayers paid the 40p rate of tax. Now, it’s nearer 25%, meaning Britain has the most redistributive tax system of any comparable country. The Chancellor is further raising taxes by stealth by freezing income tax thresholds, thereby breaching Labour’s manifesto pledge not to raise taxes on working people. The UK tax base has been severely eroded, with too few people paying too high a share of tax. In addition, the 4.8% earnings growth that is used as part of the triple lock, will take the new state pension to £12,590. For the first time, this means those on the full state pension will be taxed on that income. 

Together, this Budget is unlikely to prove popular among young people. Onward polling of 5,000 16-40 year olds show that 48% of 16-40 year olds think that the government should cut taxes and redistribute less income, while only 28% think they should raise taxes and redistribute more. Our polling also showed that young people ranked taxes, along with prices for food and energy bills and housing affordability, among their top three concerns, underscoring the likely unpopularity of the  Chancellor’s budget.

Benefits 

£16 billion higher welfare spending than forecast in the spring shows just how damaging U-turns on changes to the Winter Fuel Payment and Personal Independence Payments (PIP) have been. This is now compounded by lifting the two child limit on Universal Credit, which the OBR estimates will see 25,000 more families entitled to more benefits payments. 

Removing luxury car brands from the Motability Scheme is a start, but to make a much more significant difference, the Chancellor should have removed Motability’s bespoke tax reliefs, which cost taxpayers £1.2 billion per year. And without reforming PIP as the gateway to Motability, which the Government has ruled out, claims that attract the enhanced mobility component and therefore Motability access will likely continue to grow.

Energy

Energy costs for households and businesses have continued to rise as Ed Miliband forces Britain towards Net Zero at an impossible pace. The OBR’s forecasts project that by 2030-31 the cost of environmental levies on household bills will be 62 times higher than in 2002-03, and they are already 46 times higher as of 2025-26. 

We now have the highest industrial electricity costs in the developed world. This is destroying jobs, investment and growth while our remaining productive base goes overseas. Labour needs to swap ideology for realism, and prioritise affordability and security of energy supply for hardworking families and British businesses. 

Housing

This Budget feeds a bloated planning system instead of cutting the rules that slow development. The OBR forecasts that net additions will edge up to the end of this Parliament, hitting annual targets only in 2029–30, falling far short of their 1.5 million homes target. And despite the Government’s claim to have renters’ interests at heart, this Budget pushes further costs onto the private rental sector which will hit renters’ pockets. The OBR anticipates a ‘likely’ reduction in the supply of rental property caused by the gradual erosion of private landlord returns, driving a ‘steady long term increase in rents’.

The Chancellor is right to recognise the need for greater planning capacity to deliver housing. This is a step in the right direction. But feeding more money into a bloated planning system simply keeps it alive, swelling within the regulatory belt it wears. What will actually unlock development is simplifying the rules, cutting costs, and deregulating so builders can build, not adding more hands to strangle development. 

Capital 

Despite the announcement of a further £1.7 billion over the Spending Review period, there are notable omissions in what this will be spent on and an expectation of large underspends. With the male prison estate at 98% capacity and recent chaos from accidental releases attributed to early releases, it is especially disappointing not to see any new measures on prison building or technology in the Budget.