On 30th October Rachel Reeves presented her inaugural budget, the first Labour budget in 14 years and the first budget in history to be presented by a female chancellor. Politics aside, I think we have to appreciate the significance of this moment.
There were three key elements in the budget, with an overarching ambition to stimulate growth.
The first thing to mention is the changes Reeves has made to the fiscal rules. These are the rules the government must work within; the budget is sent to the Office of Budget Responsibility (OBR) ahead of time to ensure the plan adheres to the fiscal rules. Budgets can only be finalised once the OBR has verified that (in their view) the fiscal rules will be met over the plan.
Balance the current budget, so day-to-day costs are met by revenues, this needs to be done by 2029-30 then by the third year of the plan on a rolling basis.
This was previously required in year five of the plan. The time horizon has been shortened to avoid politicians adhering to the fiscal rules by using unrealistic assumptions in the outer years of the plan, such as unlikely spending reductions or tax hikes.
That Public Sector Net Financial Liabilities (PSNFL) need to be falling as a % of GDP by 2029-30 and then in the third year of the plan on a rolling basis. This was previously Public Sector Net Debt (PSND) and was required in year 5 of the plan. The change in the debt definition enables the government to net off non-current financial assets such as student loans and local government pension assets from the debt figure.
The change in definition has enabled the chancellor to raise capital investment significantly over the 5-year plan, as the newly defined net debt figure is lower than the previous definition. Again, the time horizon has been shortened to avoid politicians adhering to the rule by planning cuts to capital investment in the outer years of the plan, when in reality these cuts would never actually arrive.
In order to increase spending on public services whilst adhering to the stability rule, the chancellor announced £40bn of tax hikes. This is a significant tax increase, in fact the largest aggregate tax increase announced in a budget since 1993. We were warned. Both Kier Starmer and Rachel Reeves in the run up to the budget both saying this would be a challenging budget for many, and “those with the broadest shoulders should bear the heaviest burden”.
Below is a list of the key tax changes.
The main tax increase was the increase in the employer NICs (£25bn increase), which will be meaningful for businesses, especially alongside the 6.7% increase in the national living wage (NLW). Hiring a full-time worker on the NLW will now cost 8% more vs last year, and a part time worker will cost 11% more.
The OBR have assumed 61% of the increase in NICs will be absorbed through slower wage increases from 2026-2027, 15% through consumer prices and 24% through profits – I’ll let you decide for yourselves whether or not that constitutes as a tax on working people.
Rachel Reeves has pledged £100bn of extra capital spending over the 5-year plan. This will be used to build infrastructure alongside other capital projects such as schools and hospitals. This equates to £13bn extra in 2025-2026, rising to above £20bn/ year from 2027-2028.
economic impact
Following the budget, the OBR published their revised forecasts for the UK economy, integrating the government policy from the budget. They expect inflation to be above the 2% target every year on average until 2029. As a result, the market adjusted the expected pace of Bank of England rate cuts, assuming that if inflation is higher for longer, the Bank will not cut interest rates as quickly.
Future interest rate expectations rose 0.2% on average on the day, which if fed into mortgage pricing would increase the cost of a £200k mortgage loan by £400 per year. It’s worth saying that interest rate expectations are moving all the time, so you can’t simply look at the budget in isolation to determine future mortgage rates.
It's difficult to evaluate the impact of the budget on growth and the labour market. Increasing taxes, in particular the employer NICs increase in isolation makes it more expensive for businesses to hire new staff and maintain current staff. This could deter businesses from hiring new people in the future and increasing current employees’ wages.
Equally, the pledge to increase capital investment; improving railways and roads, building or improving schools and hospitals, is good for the economy. This investment will create new jobs and stimulate growth. This means there will be more money in the economy to spend on goods and services, which is positive for businesses. It is too early to tell whether or not the aggregate impact will be a success, but I am certainly hopeful it will be.
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