The run-up to November’s Budget was met with a high degree of anticipation. There was widespread speculation that the Chancellor would have another big fiscal hole to fill, thanks to higher debt-servicing costs, a tepid growth backdrop, and the government’s U-turn on proposed welfare reform. In response, the government looked poised to raise income tax, which would have broken a manifesto commitment to not raise taxes on “working people”. But this was subsequently backtracked, causing confusion over what exactly a new bout of fiscal consolidation would look like; and, in particular, whether a “smorgasbord” approach to tax rises would lead to more distortions on activity. The frenzied speculation made for a rocky time for both financial markets and businesses, the latter pausing on major spending commitments.
Come Budget day, it turned out that the fiscal hole was non-existent. Even before policy announcements were accounted for, the Office for Budget Responsibility (OBR) judged that the Chancellor would meet her stability rule (i.e. to balance the current budget by 2029/30) by a margin of around £4bn. This was mostly driven by changes to the OBR’s forecast: while the outlook for productivity was downgraded, this was offset by stronger expectations for wage growth and inflation. As a result, the size of the nominal economy (the measure that matters for the public finances) wasn’t too different to the OBR’s previous forecast.
When factoring in Budget announcements, the Chancellor managed to meet her main fiscal rule by a margin of £22bn. But make no mistake, this was very much a tax-raising Budget: the increased “headroom” was largely achieved by £26bn worth of tax rises. Key measures included extending the freeze in income tax and NICs thresholds for a further three years, charging NICs on salary-sacrificed pensions contributions above £2000, and a host of other measures. This more than offset an £11bn increase in government spending – which mostly reflected a removal of the two-child benefit cap, and the previous U-turn on welfare reform.
Crucially, higher spending is coming well before higher taxes, with the latter largely backloaded towards the end of this decade. While this may raise questions over their feasibility, financial markets’ reaction to the Budget itself was largely positive: a larger fiscal buffer against economic shocks restored the overall credibility of the public finances.
On the one hand, the Budget was not as bad as feared; but on the other, expectations were already pretty low. The economic impact of the Budget itself is minimal: it doesn’t shift the dial on a tepid growth outlook. The Chancellor failed to fully grasp the opportunities for much-needed tax reforms, and to push forward measures to boost the economy’s supply capacity. Indeed, it is telling that the OBR did not judge any of the measures to be enough to adjust their forecast to potential output.
The Budget also adopted the smorgasbord approach to taxes that was feared. A key point to note is the further burden on labour costs arising from NICs on salary sacrifice pension contributions, and a 4% uplift to the National Living Wage. Higher employment costs have been a drag on business activity over the last year, and there is a risk that these measures only add to cost burdens.
Businesses will now want to see the government doubling-down on leveraging the experience and expertise of enterprise to unlock economic growth. This starts by applying the effective model of compromise and partnership achieved on the Employment Rights Bill, where the government has agreed to a six-month qualifying period for unfair dismissal. This demonstrates the benefits of collaborating directly with business to remove barriers to growth.
