The UK’s first female Chancellor of the Exchequer, Rachel Reeves, has just delivered her first Budget, with a confident (if fairly long) performance and a Gordon Brown-esque blizzard of statistics.

After a difficult first summer, and the longest post-election wait for a budget in 50 years, Labour have had to get their communications spot on, hence the very significant ‘pitch rolling’ by Ministers,  the new ‘Invest, invest, invest’ slogan, a tsunami of social media content, and of course an excellent piece of expectation management: briefing that they would freeze income tax thresholds for another 2 years – and then not doing so.

Labour’s poll ratings have plummeted since the election on 4 July, so the test for the Budget was as much political as economic, and Labour appears to have switched to permanent campaign mode following the replacement of ex-civil servant Sue Gray as Chief of Staff with Keir Starmer’s battle-hardened campaign chief Morgan McSweeney.

But communications could change the fundamentals of the tightrope the Chancellor was walking today. The need to find close to £40 billion in tax rises - the £22billion in-year gap plus extra funding for struggling public services - while also not raising taxes on ‘working people’ (© Labour’s manifesto), not spooking the markets in the way her Conservative predecessor-but-one did, and most fundamentally of all not hurting the economic growth and inward investment that underpins the Government’s entire political strategy. 

In headline terms, the Office of Budget Responsibility (OBR) projects that the Budget increases public spending every year by £70 billion - paid for roughly 50/50 by tax rises (£36 billion) and increased borrowing (£38 billion). This is why the Chancellor and Prime Minister are desperate to distinguish between capital spending (for which extra borrowing is allowed) and current spending (where it is not). Perhaps the most important measure confirmed today was the adoption of public sector net financial liabilities (PSNFL) to define government debt, taking into account the value of government assets, and theoretically allowing far more investment headroom. Hence the new 3-year new fiscal rules to reassure the markets. UK Government borrowing costs have risen to a 5-month high after the Budget, and there will be nerves in the Treasury as the reaction settles.

The tax rises, particularly the £25 billion increase in employer National Insurance contributions, are eye-watering in places, and the current spending real terms increase tight at 1.5%, but there was enough extra cash for the NHS, schools, green jobs and defence to cheer Labour MPs. 

The political aim was to shred the reputation of the previous Government, and Reeves cited direct quotes from the OBR that their forecasts would have been ‘materially different’ had they been provided with all the information they needed by then-Chancellor Jeremy Hunt. She compared her role as similar to Labour’s historic ‘turn the page moments’ in 1945, 1964 and 1979, and lambasted Hunt for failing to budget for the infected blood and Horizon compensation schemes.

In response, outgoing Conservative Leader, Rishi Sunak, accused the Chancellor of ‘broken promises’ on tax, of ‘fiddling the figures’ and a ‘fiscal rule fiddle’.  For now, few will be listening, but the financial markets will be the first to judge whether the Chancellor has pulled off her tightrope act.

The key measures announced today

(previous Government’s March ’24 budget figures shown in red brackets where appropriate)

Economic outlook (from OBR)

• Inflation (CPI) is forecast to be 2.5% in 24/25, 2.6% in 25/26, 2.3% in 26/27, 2.1% in 27/28, 2.1 in 28/28 and 2.0 in 2029.

• The Economy will grow by 1.1 (0.8) % in 24/25, 2.0(1.9) in 25/26, 1.8(2.2) % in 2026, 1.5 (1.8)% in 2027, 1.5 (1.7)% in 2028, and 1.6% in 29/30

• Public sector net borrowing is forecast to rise from £121.9 billion last year to £127.5 billion this year, before falling steadily back to £70.6 billion by 2029/30

New Fiscal rules

• ‘Stability Rule’: Stability rule: to move the current budget into balance, with borrowing only for investment. The rules must be met by 2029/30 at this Budget, and until 2029/30 becomes the 3rd year of the forecast (5th year), at which point the target will be the 3rd year of the rolling forecast period.  OBR forecast this will be met in 29/30.

• ‘Investment rule’: to reduce net financial debt (public sector net financial liabilities) as a proportion of GDP. This captures not just the debt that government owes, but also financial assets that are expected to generate future returns. No borrowing for current spending by 29/30 until it becomes the 3rd year, then 3rd year (5th year) OBR forecast will be met in 29/30.

Taxes

• No increase to taxes on income tax, VAT or employee national insurance.

• No increase in fuel duty and corporation tax to stay at 25% for whole Parliament.

• No extension to freeze on income tax thresholds for beyond 2028 then uprated by inflation.

• Lower business rates multipliers for retail, hospitality and leisure properties from 2026/27.

• Chancellor announced the following tax rises:

o NICs for employers to rise to 15 (13.8)% from April ’25. Salary threshold for employer NICs reduced to £5k (£9100) but increased employment allowance for SMEs from to £10.5k (5k) for SMEs. Cumulatively raises £25bn by end of forecast

o Freeze fuel duty for 2 years

o Capital gains tax low and higher rates raised to 18 (10)% and 24 (20)% but residential property stays at 18% and 24%. CGT changes raise £2.5bn by end of forecast

o Increase tax on ‘carried interest’ for private equity investors to 32(28)% from April 25 with new rules for a ‘fairer, simpler’ system to be introduced from April 26.

o ‘Non doms’ tax regime abolished from Apr 25 with introduction of new resident-based scheme at internationally competitive rates.

o Surcharge for stamp duty land tax on second homes rises to 5(3)% from tomorrow

o Energy profits levy to go up to 38% and will expire in March 2030

o Inheritance tax. Threshold frozen until 2030 (2028). Closes ‘loophole’ by bringing inherited pensions into inheritance tax at 50% relief.

o Cigarette duty increase of RPI + 2.5% and new flat rate duty on vaping liquid

o Alcohol duty increase of RPI but cut in draft duty by 1.1% in pubs – ‘a penny off a pint in the pub’. Cumulative duty changes raises £1bn by end of forecast

o Increase differential between EVs and petrol/diesel cars. Generates £400m in tax.

o Air Passenger Duty to go up by ‘no more than’ £2 for economy flights. Private jet APD rises by 50%

o Private school’s exemptions end for VAT (Jan 25) and business rates (Apr 25).

Public Spending

• Real terms growth in day-to-day public spending at 1.5 (1) % for current spending and 1.7% including capital spending. Government departments expected to make productivity and efficiency savings of 2 percent per year.

• New Office for Value for Money under David Goldstone

• Triple lock confirmed, basic and state pension, pensions credit rise by 4.1% in 25/26

• Core schools budget increase of 2.3%, plus £300m for further education and 6% increase in real terms in SEND spending

• Welfare: work capability assessment savings (outlined by last Government) to be delivered plus new ‘crackdown’ on welfare fraud of £4.4 bn per year by end of forecast and Get Britain Working white paper to be published.

• Bus single fare cap of £2 extended until end ’25 but increases to £3.

• Defence spending increases by £2.9 billion per year including £3bn a year for Ukraine

• £1.3 bn in additional funding for local gov, £230m for homelessness/rough sleeping

• Greater Manchester and West Midlands first mayoral areas to have integrated funding settlement from next year.

• Increase in spending of £3.4bn for Scotland, and £1.7bn in Northern Ireland and Wales through the Barnett formula.

Investment

• New investment rules deliver ‘£100bn in new investment over next 5 years’ in capital spending Capital budgets set for 5 years extend at each CSR by 2 years.

• Business Secretary to outline multi-year funding settlements including £1bn for aerospace R&D, £2bn for automotive, £520m for life sciences manufacturing fund.

• £3.1bn in spending for affordable homes programme, and £3bn in support for guarantees for capacity and to help small housebuilders

• CPI + 1% social housing settlement for next 5 years

• Confirmed funding for existing projects including: Trans Pennine Upgrade, EWR and public funding for tunnelling for HS2 to Euston to enable private funding of Euston station.

• Extra £500m in road maintenance budget for potholes

• £1.3bn in funding for connectivity in city regions including ‘mass transit’ in Leeds/Bradford

• 11 new green hydrogen projects in England, Scotland, and Wales

• Warm Homes Plan: £3.4bn over next years for 350k homes.

• Great British Energy and National Wealth Fund capitalisation confirmed

• £6.7bn in capital investment (19% increase) for Department for Education next year

• NHS: Confirmed 10 year plan delivered in the spring, with more details in the New Year.

• 2% productivity growth target in NHS from next year

• 4% increase in current NHS spending and 3.1% increase in NHS capital spending

• £1.57 billion for NHS waiting times, diagnostic centres and surgical hubs

• The government will also reduce the rate of business property relief to 50% in all circumstances for shares designated as “not listed” on the markets of a recognised stock exchange, such as AIM

Other Measures

• Minimum Wage: confirmed 6.7 % minimum wage rise for over 21s to £12.21 (£11.44) an hour. Single adult rate to be phased in with 16.3% rise for those under the age of 21 to £10 an hour.