David Gauke:
Hello and welcome to the latest in our Negotiating Government podcast. This is David Gauke, Chair of Negotient, a negotiation consultancy specialising in public sector and private sector negotiations. I'm delighted to be joined once again by John Hall, former senior Treasury official who worked on tax policy amongst many other things. We're going to have a conversation about budgets. John, very good to be with you again.

John Hall:
Nice to be back, David.

David Gauke:
Excellent. What we're going to do today is three things. First of all, we are going to say a little bit about the choices facing Rachel Reeves in her budget on the 26th of November. This is not going to be endless speculation as to what will or won’t be in there, but we’ll have a discussion about that.

Secondly, we’ll have a conversation about the budget process. I saw a fair few budgets and Autumn Statements from the perspective of being a minister. John saw them from the perspective of being an official.

Finally, we’ll turn to the issue of what happens if you are in a sector that is likely to be hit by a budget measure, or has been hit by one. If you’ve been hit with a tax on your sector, or fear you’re about to be, how do you go about negotiating with the Treasury and trying to mitigate the damage? We’ll bring some practical experience to that issue.

Let’s start with the budget coming up. John, from your perspective, what are the big decisions the Chancellor is going to have to make?

John Hall:
This feels like one of those “filling the black hole” budgets. Firstly, Rachel Reeves inherited a fiscal position where large cuts in employer national insurance were funded by future spending cuts that were never going to happen. The economy has not been kind since she took office.

Secondly, she made some difficult choices. Labour went into the election not acknowledging the fiscal reality and ruling out changes to the big three taxes, which bring in about two-thirds of revenue. That significantly constrained her options.

In the last budget, she announced large tax increases of about £40 billion, but also even larger increases in public spending. That left a very small margin against her fiscal rules. Now she is likely to need further tax rises or spending cuts just to return to where she was before.

David Gauke:
That sounds right. Borrowing more isn’t really an option. Fiscal rules are already stretched, and bond markets are nervous. We are paying a lot in debt interest.

So she faces choices between tax and spending, but spending cuts are difficult given the recent comprehensive spending review and political resistance to welfare cuts. That means tax will likely carry most of the burden.

We don’t yet know the size of the shortfall, but it could be £20–30 billion. She has two key strategic decisions:

First, does she just fill the gap, or create extra headroom?

Second, does she raise money from one big tax or spread it across multiple smaller ones?

John Hall:
The most important thing is credibility. The UK is paying the highest interest rates in the G7, despite relatively moderate debt levels. That suggests a credibility issue.

She must demonstrate commitment to fiscal rules. Market interest rates have already eroded part of her margin, and policy reversals have reduced it further.

On tax strategy, there’s both an economic and political dimension. The Treasury may have dozens of potential measures. It’s easy to make the numbers work on a spreadsheet but lose sight of economic impact.

If she avoids raising the big three taxes, she has two options: stealth increases or smaller targeted taxes.

Freezing income tax thresholds has already raised large amounts. She may extend that. Alternatively, she may target smaller taxes, but these often affect specific groups heavily and can create political backlash.

The key decision is whether to make one broad-based change or many targeted ones.

David Gauke:
That reminds me of the pasty tax. A VAT increase raised £14 billion with little fuss, but a small technical change caused a major political storm.

There’s a lesson: if you want to raise money, use the big taxes. But politically, that’s difficult due to manifesto commitments.

There’s also the question of whether to take more pain upfront or spread it out over time. That’s a political judgment.

John Hall:
Historically, very few Chancellors remain in post long enough to deal with the long-term consequences of their budgets.

Another point is that tax rises can be more acceptable if linked to spending people value. That has worked in the past.

David Gauke:
But that requires a clear narrative, which seems to be missing at the moment.

Let’s move to the budget process itself. John, from an official’s perspective, how does this work?

John Hall:
Two key institutions are involved: the Treasury and the Office for Budget Responsibility.

The OBR produces forecasts and assesses whether the government meets its fiscal rules.

Meanwhile, the Treasury develops many potential measures. These come from ministers, departments, HMRC, and officials.

There are multiple iterations between the Treasury and OBR to assess costs and impacts. The Chancellor then selects a package of measures that meets fiscal targets.

David Gauke:
An important point is that many measures are developed but never implemented. Time spent on a measure doesn’t necessarily reflect its importance.

Some simple measures raise large sums, while complex ones may raise little.

John Hall:
Exactly. Nothing is final until the Chancellor decides. Even late-stage assumptions can change.

David Gauke:
And the process doesn’t end on budget day. There is often consultation afterwards, with multiple stages before legislation is finalised.

Let’s turn to how industries respond if they’re affected by tax changes. How should they engage with the Treasury?

John Hall:
First, decide whether you are trying to block or shape the policy.

Trying to stop a policy outright is rarely successful. More effective is acknowledging the government’s objective and suggesting a better way to achieve it.

Externally, you might campaign. Internally, you should be constructive.

The most effective lobbying I saw involved presenting alternatives that aligned with government goals but worked better for the sector.

David Gauke:
There’s also a negotiation dynamic. Governments may be more willing to adjust policies if they can present changes as positive outcomes.

At the same time, if sectors don’t push back, governments may assume they can increase taxes further.

Timing matters. Understanding how the Treasury works and when to engage is crucial.

John Hall:
Also, ministers are often in “listening mode” during meetings. That can be frustrating, but decisions are only made once the full package is considered.

Finally, ministers value outcomes where stakeholders say, “You listened and improved the policy.” That helps build credibility and acceptance.

David Gauke:
That’s a very good point. And on that note, thank you for listening to this episode of Negotiating Government. If you find yourself needing to negotiate with the Treasury, you now have some insight into how it works.

Many thanks, John. Thank you everyone.