By Kel Nwanuforo
This was a big Budget – on multiple fronts.
The first from a Labour government since 2010. The first delivered by a female Chancellor of the Exchequer. Surely one of the longest speeches ever delivered at the despatch box.
Most would agree, the most anticipated, the most speculated-about, perhaps the most feared Budget statement in modern history.
As a piece of political and economic box office, it did not disappoint.
The headline, stated surprisingly baldly by Rachel Reeves herself, is that the Budget raises taxes by an eye-opening £40 billion. That’s not far off 2% of the UK’s entire annual output.
Although as promised by Reeves ahead of time, there is nothing in the way of direct increases to the ‘big three’ taxes – income tax, employee National Insurance (NI) and VAT – there is still plenty for anyone investing in or doing business in the UK to note.
The bulk of the tax-raising burden has fallen on business, that much is clear. The increase in employer’s National Insurance (NI) is considerable, with the rate rising from the current 13.8% to 15.0%. This is coupled with a sharp reduction in the threshold at which employer’s NI starts to be levied, from the current £9,100 to £5,000. These measures alone will raise around £25 billion.
According to our calculations, these changes will increase the cost of employing a worker on a salary of £35,000 by over £1,000 from April. At the same time, the National Living Wage (NLW) will also rise again, by an inflation-busting 6.7%. This will add £1,400 to the cost of employing a full-time worker on the NLW.
These changes will wreak sizeable increases in the wage bills of many businesses. Indeed, the Chancellor herself obliquely noted that some negative knock-on effects were likely; it does not take a rocket scientist to work out these will come in the form of reduced hiring and lower or fewer pay rises and bonuses for employees. That is likely to act as a headwind on consumer spending in a service-led economy.
The other tax rises in the Budget are likely to be less consequential, whatever the losses or unhappiness they create for those in particular circumstances. The increases in Capital Gains Tax were lower than much speculation had suggested, while changes to IHT eligibility and reliefs are too modest in scale to affect the broad macroeconomic picture.
Whether one agrees with the higher taxes or not, there are positives in what is to be done with them. Increased funding for creaking public services is not just a positive end in itself; a healthier, better-educated population should reduce public spending in the long-term (through lower NHS and benefits bills) and contribute to structural economic growth (through higher productivity).
Further, targeting the payment of all day-to-day spending through tax revenue rather than government borrowing, as per the government’s new ‘stability rule’, could help keep market interest rates low. Indeed, the independent Office for Budget Responsibility expects that the government will now be running a surplus of £10.9bn on what is known as the ‘current budget’ by fiscal year 2027-28.
Separately, the decision to change the government’s debt target to exclude investment spending should also be beneficial in the long run. The UK has long suffered from a dearth of investment – both public and private – which has contributed to sluggish economic growth in recent years.
Borrowing to invest in better transport infrastructure, green technologies and life sciences should begin to raise the productive potential of the economy in the years ahead.
While there are no cast-iron promises in politics – and no defence against further unforeseen crises like pandemics or wars – the pre-briefing around the Budget has very much been that it is a case of getting the pain out now; that the government does not want to be seen ‘coming back for more’ each time.
Further, the wave of public investment in areas such as green technology and infrastructure could even unleash attractive opportunities for funds to co-invest on some projects. We will be keeping a watching brief on this.
Lastly, one of the key reasons for optimism in the wake of the Budget is a very simple one: it is now, finally, behind us. The very uncertainty around what was coming had been damaging business and consumer confidence in the lead-up to today. Now we know – everyone knows – and can begin to adapt and plan accordingly.
While today’s tax rises will undoubtedly count as a ‘debit’ on investors’ ledgers when considering the UK, there is still much to commend us: reasonable growth prospects; low unemployment; political stability and modest inflation. This is a good backdrop for the value imbued in the low ratings at which the FTSE is trading to begin to be unlocked.
