This article was first published on the CapX on 30th October 2024.
This was a tax, borrow and spend Budget. Taxes and borrowing are up to fund increased public spending and higher public investment. The Budget contained 70 specific tax and spending measures. The net fiscal boost over six fiscal years is a sizable £208 billion, with a net boost of £24.7bn this year and £33bn in 2029/30 – the last year of the forecast.
The positive aspect of the Budget is the desire to boost public investment, focused on infrastructure, the green agenda and on improving the supply side of the economy. The Chancellor correctly cited that UK investment – both public and private – is low. This is a longstanding problem. The benefits of higher public investment and its multiple effects, however, are long-term, but immediately it increases the already high amount of borrowing. Against a backdrop of a potential ‘debt trap’, some may fear adopting this approach. Regardless, addressing the UK’s low rate of investment should also include incentivising the private sector through targeted fiscal policies and getting the City to close funding gaps.
The Chancellor was keen to differentiate between such higher public investment, which as the Office for Budget Responsibility factors in, will boost growth over the longer-term, and day-to-day public spending, which she is trying to cap through her fiscal rule of not borrowing for day-to-day spending. That makes sense.
Compared with the March Budget, spending is up by £25.9bn this year, and by 2029/30 will be £74.2bn higher. By then, public spending as a share of GDP will be a high 44.6%. Public spending will rise by more than taxes rise, resulting in the net fiscal boost. Consequently, borrowing will rise significantly versus previous plans.
The challenge from the Budget is the burden that it will impose on the private sector. As expected, taxes rose, focused on higher employers’ national insurance, which will add to employment costs and hit small firms and potentially dampen growth prospects.
Taxes will rise significantly, up by £24bn next year, and up by £41.2bn per year by 2029/30. As a result, tax as a share of GDP will rise from 36.4% this year to – in the words of the OBR – a ‘historic high of 38.2% in 2029-30’, 1.1% higher than outlined in the March Budget. It was, however, welcome from a growth perspective that the freeze on income tax allowances will not be prolonged and that fuel duty will not rise, as had been feared.
Stronger economic growth, alongside reform, is the best way to make inroads into this. However, the growth outlook is modest, despite a near-term bounce. A fundamental challenge for the UK is its poor, dismal growth rate, particularly in the wake of the 2008 global financial crisis. At the time of the March Budget, the OBR was upbeat about the immediate economic outlook, forecasting 0.8% growth for this year and 1.9% next. Then independent forecasters were predicting 0.4% growth for this year. Today, the OBR’s forecast of 1.1% growth for this year is in line with the consensus, rising to 2% next year, before slowing to 1.8% in 2026 and then stabilising around 1.5%. They are cautious about inflation returning to the 2% target, which if correct would limit the extent to which the Bank of England may be able to ease interest rates.
Such a macro-economic outlook doesn’t allow huge headway to be made into reducing the burden of debt, although it is expected to fall marginally. As expected, the Budget unveiled a change in the definition of debt towards a balance sheet approach – including assets, as well as liabilities. The Chancellor has focused on public sector net financial liabilities (PSNFL) – or ‘persnuffle’ – replacing public sector net debt (PSND). The latter is expected to be 98.4% of GDP this year, but a still high 97.1% by 2029/30. PSNFL, meanwhile, moves from 83.5% to 83.4% over this period.
While there is a lot to be said for moving to a balance sheet approach, the Chancellor has avoided using the broadest measure – public sector net worth – which I felt might be a stepping stone to a wider debate about the quality, as well as the quantity, of public spending, as there are so many off balance sheet items such as previous public private initiatives.
The Chancellor, at the beginning of her speech, was keen to put this Budget in a historic context from a political perspective. From an economic and financial markets perspective, it was felt that whoever won the election would need to address our poor fiscal position, and the high level of debt. Boosting public investment, funded by higher taxes and borrowing, has been the focus today. Addressing the scale of debt has been left to a future date. Unless growth moves materially higher, addressing the overhang of debt remains the key future challenge.