Last week’s UK Budget, the Labour party’s first in 14 years, was referred to as a Budget for boffins and one that reflects how the experts have taken back control.
Indeed, it was full of detail and subject to a full 10-week assessment by the independent Office for Budget Responsibility (OBR) to assess the implications of all the tax and spend measures. In the time before the Budget, we were well briefed about a £22 billion fiscal ‘black hole’ and the need for difficult choices to be made to put public finances on a more stable footing.
The length of time taken to produce the Budget since July’s election caused a lot of consternation among businesses and consumers. It’s no surprise that when you spend three months telling people how dire public finances are, optimism dips.
The negative rhetoric has delivered the lowest optimism readings this year among businesses and consumers, according to GfK. The Budget doubled down on laying the blame for where the UK’s economy and public services are at the door of the previous government.
The inheritance of failure was traced back to 2010′s austerity Budget via Brexit and the chaos of Truss. Public services, the chancellor noted, are on their knees and improvements in living standards are weak.
The Budget had a difficult dual purpose – to put public finances on a more stable footing and to create the conditions for investment in infrastructure and public services. The result was a big and consequential set of announcements that will deliver £40 billion in tax increases and changes to the UK’s debt rules to facilitate more borrowing within these adapted fiscal rules.
Not only has £40 billion in additional taxation been announced, government borrowing is expected to reach £127 billion this year, considerably higher than previously expected. The markets appeared reasonably sanguine about all this in the immediate hours following the chancellor’s speech but seem to have come to a quick realisation that the additional taxes are paired with a lot of additional borrowing.
At the time of writing, UK 10-year gilts (the price of which was a key factor in why a lettuce lasted longer than Liz Truss’s prime minister stint) are moving upwards. If this gilt price move sustains, we could see fewer of the expected reductions in Bank of England interest rates over the next six months or so.
Economic growth is crucial to the government’s ambitions so there will be relief that the measures taken in Labour’s first Budget in 14 years have been assessed by the OBR to boost growth GDP.
Real GDP growth is forecast to pick up from close to zero last year, to 1.1% this year, 2.0% in 2025, and 1.8% in 2026, before falling back to around 1.5% thereafter. It is growth, but nothing to get excited about I’m afraid. Average growth rates before the global financial crash were 3% per year (between 1993 and 2007) and have averaged 1.5% per year since.
Of course, the main concern in any Budget is ‘what does it mean for me?’ The promises not to increase income tax or VAT were kept but employers have taken a big hit in Labour’s record tax raising. An increase to the national minimum wage will be most welcome by those employees on that wage but, when coupled with the increase in employers’ national insurance contributions, there are many employers who are gravely concerned.
This could have flow through impacts on reduced pay rises, reduced recruitment, cost cutting elsewhere, higher prices, or even people being made redundant. None of these scenarios shout ‘economic growth’ and the government will be hoping that businesses have broad enough shoulders to bear this additional tax burden.
There were many other announcements, particularly around inheritance and capital gains taxes that could have seismic impacts on locally owned family businesses. My Grant Thornton tax colleagues have written about this in detail at grantthorntonni.com and I would encourage you to read those words.
At the local level, the £1.5 billion of additional funding coming here as a result of the Budget is a very welcome injection, as is the return of the city and growth deals for Causeway Coast and Glens and Mid South West.
As welcome as it is, spending it well is the eternal challenge that faces our public sector. Plus, I’ve no doubt that, regardless that £1.5 billion is a bigger settlement than expected, and the biggest we’ve ever received, it isn’t enough.
- Andrew Webb is chief economist at Grant Thornton NI
