WE never really know how good or bad a Budget is until a few weeks have passed, and the reaction sets in. Chancellors draw up their Budgets in secret, even if – like Rachel Reeves – they leak bits beforehand.

The Budget process insulates a Chancellor from external scrutiny – economic as well as political. Folk forget that the all-powerful Treasury is actually quite small in numbers, made up of barely 3000 civil servants.

It is an Oxbridge-educated elite with next to no understanding of the real world, whether of households or businesses. The Treasury mindset is technocratic, patronising and superior. And the department’s forecasting models are ropey to say the least. So it is no wonder that, when exposed to reality, most Budgets implode.

This is precisely what has happened to last month’s Budget, which added £40 billion annually in new taxes, mostly levied on business. Reeves claimed it was geared to increasing Britain’s woefully poor rates of economic growth, investment and productivity. Yet she imposed higher National Insurance contributions for employers (a tax on jobs), higher business property rates, and a higher minimum wage.

The increase in the minimum wage might be welcome in itself. But allied to the other big rises in business costs, the impact is likely to be fewer jobs in labour-intensive industries such as retail and hospitality. Overall, Reeves’s Budget will most probably have a negative impact on employment, profitability and growth. Ouch.

There is also a likely impact on interest rates. These are set independently by the Bank of England, not the Treasury. Reeves and her merry band of Treasury gnomes were counting on the fact that the Bank had already signalled a fall in rates from the present 4.75%.But the impact of the Budget is set to boost inflation in the labour-intensive service sector, currently running at around 5%.

As it is, UK inflation rose sharply and unexpectedly in October, from 1.7% to 2.3%. This was due mostly to energy costs. But add in a jump in service costs and the inflation number could keep rising.

According to business advisory group KPMG, inflation could hit 3% in early 2025. That will cause the Bank of England to delay interest cuts. Rates might even have to increase. Ouch again.

But won’t economic growth rise to compensate, as Reeves and Prime Minister Keir Starmer are promising us? Growth depends on business investment,and business investment depends on the confidence of firms that they can earn a return.

READ MORE: Majority of Scottish businesses support fossil fuel phase-out, new figures show

The latest data suggest the Budget has actually punctured business confidence. The composite PMI index, the standard measure of business expectations in manufacturing and services, has suddenly dropped below 50. This means businesses expect lower orders. Another ouch for Reeves.

But surely consumers will come to the rescue? Higher public sector wages and the increase in the minimum wage should surely boost retail spending and economic growth. Presumably the Chancellor was counting on that occurring, but it does not look so likely now.

First, a jump in energy bills has offset most of the gain. Besides, consumers now owe the energy companies around £3.7 billion, which will weigh heavily on other consumption.

On the housing front, average UK home prices increased by 2.9% in the 12 months to September. So buying a new house costs more. That means you need to save more for a deposit. That reduces other consumption. Another ouch.

Then there are the stealth taxes that lurk in every Budget and only become apparent after the Chancellor has sat down. Reeves was happy to announce a 40% relief on business rates for the retail, hospitality and leisure sectors. Fine – except the present relief rate is 75%.

True, this higher rate (left over from Covid) was due to expire next year. However, Reeves is hardly being generous by offering to break one arm instead of two. Shops, pubs and restaurants will now have to pay an extra £900 million more than they anticipated. Ouch, ouch, ouch.

What this is adding up to is a return to something economists call “stagflation”. This is when an economy suffers from both slow economic growth (or even recession) and price inflation at the same time. Call this a double dose of misery.

The last time the UK suffered from stagflation was back in the 1970s when Labour was also in government. The National Institute of Economic and Social Research, a respected independent forecaster, predicts there is a 60% chance that the UK will be in recession next year.

Where does that leave Scotland? The SNP Government will publish its own Budget for next financial year on December 4. At the weekend, First Minister John Swinney said this Budget would create “conditions for every person in Scotland to thrive”.

READ MORE: SNP slam 'anti-democratic' Alex Cole-Hamilton after Budget indy spending comments

Let’s hope so, but the UK economic picture makes this hard to achieve. On the other hand, the UK Budget handed Holyrood a cool £1.4bn in Barnett consequentials for 2024-25. This will cover the existing £400m shortfall and leave a handy surplus of £1bn.

This should mean that for the next few years, even if pay settlements are high, the Scottish Government will be able to balance the books without dipping into reserves, including cash obtained from selling offshore wind licences.

WHAT should the SNP do with its new-found financial wiggle room? One suggestion has been to restore the Winter Fuel Payment, at a cost of circa £150m. That would certainly put Anas Sarwar’s troops on the spot.

And more cash will certainly go to the NHS. However, I would caution Swinney and Finance Secretary Shona Robison to beware of the dark cloud of stagflation hanging over the UK economy.

We need some of the Barnett windfall to be directed to boosting Scottish economic growth. That in turn will secure more tax income for Holyrood. But how to boost growth?

The speediest way is to increase the construction of affordable homes in urban areas, and to target support for locally-owned builders with a potential for expansion. Small house-building companies – mostly Scottish – now deliver less than 20% of new homes per year, down from 40% in 2017. That’s a criminal waste.

Instead, market share has been captured by large construction companies, which are mostly England-based. Scottish builders blame Holyrood for their plight, citing excessive energy efficiency standards and bureaucratic planning rules, which fall more heavily on smaller contractors.

Yet these smaller, local companies frequently control more brownfield sites for building in urban areas than large house builders, which gobble up greenfield and farming land.

Again, on the growth front, Shona Robison should use some of her spare cash to reduce the business rates poundage, to help offset the jump in UK employer National Insurance. She also needs to reform the non-domestic rates system – and pronto.

This penalises the hospitality sector, which pays business rates on turnover while other sectors, such as retail, pay based on square footage.

One other post-Budget revelation is that Chancellor Reeves had … er, “tweaked” her profession CV. Let’s hope she finds time to “tweak” her Budget too.