Britain's big Budget: will it work?

Steven Bell

Chief Economist, EMEA

Key Takeaways

Although the budget was well trailed, the scale of the announced fiscal changes came as quite a surprise, with more than 70 policy notices
The Labour chancellor announced such an increase in taxes and borrowing, in order to fund public spending, that the gilt market sold off, despite a favourable initial reaction
The chancellor highlighted the £22 billion black hole in the public finances, but didn’t mention a potential £100 billion health and disability benefits bill, highlighted by the IFS, which could be this government’s biggest challenge
Fears around tax rises had seen business and consumer confidence wane in the run up to the election, and they have been realised. But the decision to hold corporation tax could see businesses respond by boosting productivity – we hope

Transcript

The first Budget by the new Labour government was subject to enormous anticipation, fuelled in part by an unprecedented degree of leaks and advance press briefings. It was nonetheless quite a surprise in terms of the sheer scale of the fiscal changes: a huge increase in tax, a big increase in borrowing and a significant rise in government spending.

There was a long list of policy measures – I counted 71 – but far and away the biggest change was the increase in employers’ National Insurance contributions (NICs). Coupled with the 6.7% increase in the minimum wage – a 16% increase for those aged 18-20 – this represents a sharp rise in the cost of employing lower paid workers. The hope is that this will encourage the shift away from a low wage, low productivity economy; the fear is that businesses will simply employ fewer people.

The extra taxes and extra borrowing will be used to fund a big increase in public spending. So big that the overall fiscal loosening is reckoned to be substantial. The Office for Budget Responsibility estimates that this will add to inflation and lead the Bank of England to slow the pace of interest rate cuts. In addition, while the gilt market initially reacted favourably to the announcements, once the scale of extra borrowing became clear the market sold off.

Indeed, although the loosening of the fiscal rules had been flagged in advance, we had been led to believe that the chancellor would not use all of it, leaving a wide margin to reduce the risk of further tax increases or borrowing in the rest of this parliament. In the event she left herself little wriggle room, and even that has been exhausted by the rise in gilt yields, according to some estimates. The Treasury has been rattled by markets’ reactions and is reported to be considering “reprofiling” the increase in spending to reduce near-term borrowing.

In her Budget speech, the chancellor made much of the so-called £22 billion “black hole” in the public finances that had apparently been hidden by the previous government. But she made no mention of an even bigger problem that had been investigated by the Institute for Fiscal Studies (IFS) well before the last election: the ballooning cost of health and disability benefits. In only the past three years the cost of this has risen by another £20+ billion. Even more worrying is the projected increase in this bill. By 2028, the IFS expect it to reach £100 billion at today’s prices, equivalent to around £4,000 for every household in the UK. The causes of this increase are many and varied, but given the problems elsewhere in the nation’s finances, tackling this problem is arguably this government’s biggest challenge.

For most of the past 12 months I have been optimistic about the prospects for UK growth and inflation – and the data had broadly supported that view, until recently. Important surveys of business and consumer confidence, which had been improving, have dipped. Some of that move had been attributed to fears of tax increases in the Budget. Those fears have certainly been realised, and more.

Before we get too pessimistic, we should consider one area that was spared in this Budget: corporation tax. By leaving the rate at 25% and retaining the policy of full expensing of investment, businesses could respond by boosting productivity. That incentive is increased by the rise in NICs and the minimum wage. It is possible that the UK shifts to a high-wage, high-productivity economy. I am sceptical that will happen, but I hope I am wrong.

4 November 2024

Key topics

Subscribe to insights

Get the most out of your email by tailoring the types of insights and information you would like to receive from us.

Latest articles

21 Nov 2024

2025 Macro Outlook: Slower growth amid geopolitical uncertainty, but opportunities remain

Headwinds are blowing but conditions are supportive, so we see both risks and opportunities in 2025.

20 Nov 2024

Stalling car auction sales suggest broader consumer weakness

The popularity of online car auctions has created a unique two-way market dataset that is liquid and representative of all the US. Alongside wider income and expenditure data, we can see consumer pressures rising up the wealth ladder.

19 Nov 2024

In Credit Weekly Snapshot – November 2024

Our fixed income team provide their weekly snapshot of market events.

PDF

Britain’s big Budget – will it work?

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients) This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This material should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

Related Insights

11 November 2024

Multi-Asset

Multi Asset

Steven Bell

Chief Economist, EMEA

Will trade wars end the Equity Bull market?

Assessing the impact of Trump-era trade tariffs.

28 October 2024

Multi-Asset

Multi Asset

Steven Bell

Chief Economist, EMEA

Looking beyond the UK Budget

The new UK government’s first Budget looks set to be an historic event.

21 October 2024

Multi-Asset

Multi Asset

Steven Bell

Chief Economist, EMEA

Will there be any good news in the Budget?

Taxes set to rise but the economy is improving.

21 November 2024

Macro Outlook

William Davies

Global Chief Investment Officer

2025 Macro Outlook: Slower growth amid geopolitical uncertainty, but opportunities remain

Headwinds are blowing but conditions are supportive, so we see both risks and opportunities in 2025.

20 November 2024

Fixed income

Michael Laskin

Senior Analyst, Fixed Income

Stalling car auction sales suggest broader consumer weakness

19 November 2024

Fixed income

Fixed Income Desk

In Credit - Weekly Snapshot

In Credit Weekly Snapshot – November 2024

Our fixed income team provide their weekly snapshot of market events.

Important information

In Switzerland issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland