Five Things To Know About the UK Budget
Focused on business - in case you want a distraction from that other election
I know, I know, there’s a minor election happening elsewhere in the world next week. So, if you’re in need of distraction, below are my five main takeaways from the UK budget, for those who may not have been paying much attention.
1. This was a big shift in UK fiscal policy - or was it
After 14 years of Conservative rule, the Labour government delivered a budget that contained close to £40 billion of tax rises plus additional borrowing to fund increases in day-to-day spending on public services and a programme of investment.
It marks a clear break from the austerity era of the 2010s, which was followed by ‘the covid magic money tree’ era, and finally the, ‘I really want to cut taxes but I really don’t want to stop spending’ period thereafter. The latter was defined by the government making two successive cuts to national insurance at a cost of around £20 billion1, while relying on questionable spending plans to make the numbers add up. As such it’s not quite as big a fiscal change as it seems – a £40 billion tax rise is only a £20 billion rise versus 2023 – but it is nevertheless a shift in tone and direction.
It also feels like a grown-up budget, whether you agree with the substance or not, akin to Norman Lamont’s 1993 budget that raised taxes by £33 billion in 2024/25 terms and set the UK on a sounder financial footing.2
And it sets a clear direction for the UK government, which now has five years to deliver on better public services and higher growth. Arguably the UK has its most stable economic and political foundation since before Brexit.
2. Businesses were hit but they’ve been helped in recent years
Businesses should be happy with that backdrop, but they won’t be happy with all the measures. The main revenue raiser is a rise in employer national insurance, a tax that firms pay based on each workers salary, which combined with a rise in the national minimum wage, and a new package of workers rights, is likely to increase the costs of hiring.
Small businesses will have least capacity to absorb these rising costs, but it’s worth remembering that while businesses with less than 50 employees represent 97% of UK firms (excluding those with no employees), they account for only 37% of total employment and 30% of total revenues.3
Large firms employ more people, generate more revenues, and are more productive4 – and it is large firms that will benefit most from the continuation of low corporation tax rates in the UK (the rate of 25% is the lowest among G7 economies), and full expensing on investment in plant and machinery. When it was made permanent in Autumn 2023, full expensing was estimated to represent a tax cut worth over £10 billion a year.
There’s also the point that the UK’s low wage economy may have contributed to its poor productivity performance. Increasing the cost of labour relative to capital (as recent changes in the tax system do) is a policy choice that could help to tackle the UK’s chronically low investment rates that have been a major factor in low productivity growth.
3. Higher healthcare spending can help get people back into work
The UK has a strong education system, the benefit of the English language, and better demographics than a lot of other rich countries, but it also has a glaring problem of economic inactivity that makes it an international outlier.
The UK is the only country in the G7 not to have returned to pre-covid levels of employment, with working-age inactivity levels rising rapidly, mostly due to ill-health. It costs a lot of money – spending on disability and incapacity benefits has grown by £12 billion since 2019 and is forecast to grow by a further £15 billion by 2028 – and it limits the size of the labour force and the UK’s potential output.5
There is no clear reason why the UK is such an outlier, but it’s likely the interaction of the pandemic with the state of the health service and the design of benefits. Putting money into the NHS to try and tackle the backlog of appointments, and intervene earlier to prevent long-term health conditions developing, seems a necessary, if expensive, part of getting people back into work (some rethink of the benefits system may be needed too).
4. Certainty on R&D and infrastructure spending supports private investment
While the big-ticket spending goes on healthcare and education, there’s important commitments in R&D and infrastructure that will benefit businesses in the UK. Government R&D funding is at record levels and there is a commitment to maintain the current levels of direct funding as well as the system of R&D tax credits that both small and large businesses use. R&D tax credits are generous – companies receive a cash value of between £15 to £27 for every £100 spent on qualifying R&D – and are widely utilised.
Better infrastructure is also an enabler of business growth, and having more certainty on the projects that will be funded should allow for business planning and investment in new facilities. The East-West rail line will link Oxford to Cambridge, opening an arc of land to build houses and laboratory and research facilities that are desperately in demand (although reforms to planning are critical to making the most of this).
5. Don’t get too hung up on gilt yields and growth forecasts
If all this is good, why has the UK’s cost of borrowing risen?
We’ve now had a few days for the dust to settle and to read some of the press – and the comments on those articles – you’d think the UK gilt market is in meltdown. It’s not. Yields moved up as the market absorbed new borrowing requirements, which were larger than expected and left the government with little headroom versus its new fiscal rules, and as investors priced in one less interest rate cut than before. Yields also moved up globally on US election jitters. But as I write the UK 10-year yield is 4.46% vs 4.24% one week ago – that’s not a drastic change.
There is legitimate scepticism around whether this budget can kickstart growth, and whether the numbers quite stack up. The OBR’s forecast numbers are hardly exhilarating – GDP growth rises to 2.0% in 2025 before falling back to ~1.5% between 2027 and 2029. And for all the talk of the importance of public investment, it’s only expected to increase GDP by 0.4% after ten years. Some of the revenue raising figures also look optimistic.6
But what is the alternative?
Continue pretending that the UK can have lower taxes while maintaining current levels of public services, or let public services continue to decline. The former is fiction, the latter is a valid choice; but having voted for a Labour government, the UK electorate chose a different path, and this budget sets it along that course.
See Autumn Statement 2023 p.81 and Spring Budget 2024 p.65. The AS23 and SB24 cuts to national insurance were estimated to cost £9.4 billion in 2024-25 and £10.2 billion in 2024-25 respectively.
The take from national insurance may be lower than the £25 billion forecast, and the government is leaning heavily on more resources for tax collection and combating welfare fraud to raise £6.5bn and ~£3bn respectively by 2029-30.
I’d like to think you could tackle the NHS backlog with no additional money but I just don’t see how that’s realistic — without ignoring a big cohort of the population and storing up even more future problems. Productivity has certainly cratered in the health service but at some point you just have to spend more money too, especially to catch up on capital underspend.
You clearly know Oxford well!!! East-west line may not be the best example - I don’t know all the details - but I do know that constant indecision on whether to proceed with projects is a major cause of cost escalation (that and the hopeless planning system!) So my broader point was more that it’s good to have funding certainty out for five years on projects so business can plan around that (reforms to planning reforms also critical).
The business NI changes were political. There's lots of small business owners (1-3 people) and not many large business owners. So you make lots of people temporarily happy at the cost of a few people not so much. But there's no sound economic reason for different rates of NI for different sizes of business, and longer term, this will damage the economy.
Tackling the NHS backlog to get people back to work could be done without spending a penny. You prioritise younger, working people getting appointments and surgery over older, retired people. As of 2016, 2/5ths of the NHS budget went on retired people, so it's probably larger now. And unless working people are targeted, 2/5ths of this extra spending will go on retired people.
East-West rail is a waste of money, like nearly all rail. Rail is useful for either commuting, where density is high, or for long-distance travel. And Oxford and Cambridge and all the places in between do not have the density. Oxford has few major employers in the centre, of the sort that need lots of people travelling in from miles away. There is the university and that's about it. The other major thing in Oxford is that it is a centre of medicine, but most of that is out at Headington, so by the time you get into Oxford and get out again, driving will have been quicker. It isn't even a major city now. East-West rail is a romantic project driven by train lovers who think it was wrong that we closed all those barely-used, loss-making services in the 1960s and want the Varsity Line back.
Planning, getting more labs is good, but more labs into Oxford would require an end to listed building laws, a drive towards knocking down old buildings and an end to the greenbelt. Oxford is really the worst place to try and do this. The centre is lots of listed buildings that you can't knock down, so the roads are terrible, and it has a huge greenbelt that stops development around it. It used to be an industrial city but it's now a university with a museum attached. It can't do what Cambridge does and feed off into science parks near the city. This activity is mostly around Abingdon, like the Harwell Campus, Culham, Milton Park near Didcot. This area the centre of Oxford's applied science now with 10s of thousands of people. It's easy to build there, and it's well connected by train and road already.