Rachel Reeves’ first Budget statement at the dispatch box was historic in a number of ways. Most obviously, Reeves became the first woman to deliver a UK budget as Chancellor of the Exchequer. This was also the first Labour budget since the late Alistair Darling delivered his, 14 years ago. More consequentially for the UK taxpayer though, this was set to be a tax raising budget on a scale not seen in decades.
According to Reeves, taxes had to go up for two main reasons, the need to plug a “black hole” in the public finances left by the outgoing Tory government coupled with the need for capital spending to spur growth, place public services on a better footing and to improve productivity.
In fact, the scale of the challenge facing the treasury was well understood in the lead up to the General Election. The reluctance of any of the major parties to address this was dubbed a “conspiracy of silence” by the head of the Institute for Fiscal Studies (IFS) Paul Johnson, prior to the nation heading to the polls in the summer.
The stark warnings of pain to come, coupled with the long interval between the Election and this budget, have inevitably led to a great deal of speculation in the media and concern among taxpayers.
Looming large over all discussions of the UK economy is the problem of stagnant productivity. Broadly speaking, productivity is a measure of the efficiency of the UK workforce. Before the 2008 financial crisis, the UK’s labour productivity grew at a fairly stable 2% per annum. Since 2008, GDP per hour, a common measure for productivity, has grown at an average of 0.5% per annum and is now in the bottom half of OECD nations, well below that of France, Germany and the United States. This hurts UK competitiveness and tax revenues. Economists will be watching closely to see if any measures taken by Reeves have an impact on productivity going forward.
Reeves faces a difficult balancing act, as any Chancellor would, over the coming years. Firstly, day-to-day public services must receive the funding they require. This poses a challenge as NHS spending has risen from £131 billion in 2010/11 to £185 billion in 2023/24 partially due to an aging population. This demographic change, coupled with the interaction of the triple lock and post-Covid inflation also means that the state pension bill has risen to around £125 billion, with proportionately fewer working age people to help raise the tax to keep expenditure on a sustainable footing. To these problems you may add the rising cost of borrowing, the crisis in the criminal justice system and the pressure to increase defence spending in an increasingly uncertain world. But besides the day-to-day spending, there is a need for capital investment to place public services and national infrastructure on a better footing. Done properly, this should lead to comparatively lower day-to-day spending in future but if capital investment is not seen to be effectively deployed, or if borrowing for capital investment is perceived as too high, then this could lead to a damaging increase in government bond yields, similar in kind to those seen after the Truss/Kwarteng “fiscal event”. Reeves will tweak the fiscal rules to allow her to borrow more by changing how the Treasury accounts for capital investment. This move has been broadly welcomed by economists with the proviso that borrowing for capital spending does not reach a level where bond markets will be spooked.
So what was in the budget statement?
Spending
- Minimum Wage – a commitment to raise the minimum wage to £12.21
- Money set aside for Horizon and infected blood scandal compensation set at £1.8 billion and £11.8 billion respectively
- £70 billion for a national wealth fund.
- Borrowing expected to be £127 billion or 4.5% of GDP this year.
- Carers allowance has been increased to equivalent of 16 hours at the National Living Wage.
- State Pension to increase at 4.1%.
- £100 billion in total capital spending.
- £22 billion in additional day-to-day spending for the NHS over the next two years.
- Overall, according to the OBR, Government spending will rise by £70 billion over the next 5 years.
Taxation
- Employer’s National insurance rate to increase to 15% with a reduction in the threshold at which it becomes payable to £5,000. This will raise an estimated £25 billion a year. The changes made to NI will affect those who employ lower paid staff most severely. The likelihood is that these changes will exert a downward pressure on wages. Employer’s allowance has increased which will alleviate some, but not much, of the pain.
- Capital Gains Tax rates to increase to 18% for basic and 24% for higher rate taxpayers. Full equalisation with rates of income tax was never on the cards since HMRC’s own models estimated that such changes would result in less, not more in CGT receipts. The OBR expects £2.5 billion to be raised from this change, only time will tell if this change is sufficient to disincentivise those looking to dispose of assets.
- Inheritance Tax
- IHT threshold will be frozen until 2030 at £325,000
- The Residents Nil Rate Band (RNRB) will also stay at £175,000
- Spousal exemptions will remain unchanged.
- Full Business Property Relief will now only apply for the first £1 million, relief will be 50% thereafter (i.e. 20% relief)
- Business Property Relief for AIM shares will also be reduced to 20%
- Pensions will form part of the estate on death and be potentially liable for IHT. More detail on this as it emerges.
- Stamp Duty Land Tax surcharge will be increased to 5% for second homes
- VAT will be payable on private school fees. This change has been widely briefed over recent months.
- Income Tax saw no changes, although the freeze on the personal allowance will not continue beyond 2028.
So in summary, some very large tax rises, especially when it comes to employer NI but also some changes to the IHT regime and pensions as well. This tax is set to fund a spike in spending over the near term. Only time will tell if the money can be spent effectively in such a short timeframe. The OBR projects an increase in growth in the near term but are somewhat muted after the first two or three years as the “sugar rush” of capital investment wears off.
Please do not hesitate to contact your adviser to discuss any issues raised by the budget. We will endeavour to keep you informed as more detail emerges in the coming days.