Labour’s first Budget since 2010 contained £70bn of extra spending a year, funded by £40bn in tax rises and £32bn in extra borrowing.
Chancellor Rachel Reeves said her choices were the right ones to restore stability to the public finances, to protect working people, to fix the NHS and to rebuild the country.
The OBR says growth will be undermined by the national insurance increase for employers
OBR concerns
The independent Office for Budget Responsibility (OBR) says the Budget temporarily boosts GDP growth to 2% in 2026 but leaves output unchanged in the medium term. Its forecasts predict just 0.14% of extra growth in GDP by 2029 from the large public investment – with more meaningful benefits being realised only after the next general election.
It also says growth will be undermined by the national insurance (NI) increase for employers, reducing overall employment by about 50,000, and with businesses passing around three-quarters of the cost to workers. Their smaller disposable incomes will depress consumer spending and commit the economy to the same mediocre levels of growth as those that have hampered the UK for the past decade.
The Institute for Fiscal Studies also estimates that once the wider effects of the NI increase are considered – including those on jobs and wages – the move will end up raising less than expected.
‘Sophisticated investors will always look at more than the headline rate’
Some dispute these predictions as too pessimistic, and Labour has also pledged other measures to boost growth, such as reforming planning to build more homes, and a modern industrial strategy for growth-driving sectors like finance, and professional and business services.
Open for business?
Keeping corporation tax at 25% has been welcomed as a step in the right direction. Businesses are less likely to invest when it would make them liable for higher taxes. While intended as signal that the UK is open for business in the G7, it remains to be seen if this freeze will attract investment.
‘Sophisticated investors will always look at more than the headline rate, and simplification and reform of the way taxable profits are calculated would reduce the administrative burden for smaller businesses and increase certainty for larger ones,’ says Jason Piper, ACCA’s head of tax and business law.
At a glance
- The main tax rise is on employers’ national insurance (NI) contributions – an increase of 1.2 percentage points to 15%, with the threshold lowered from £9,100 to £5,000.
- Taxes on capital gains and on the ‘carried interest’ performance fees fund managers make have risen.
- On inheritance tax, pension pots being passed on are brought into scope for the first time, along with agricultural land.
- The non-UK domiciled tax scheme has been scrapped.
- VAT on private schools will be levied from January next year.
- Two-thirds of Budget spending is on ‘day-to-day’ matters (mostly in health and education), while one third is on capital spending in areas including the NHS, transport, and in driving growth in regional towns and cities.
Reeves has since said that the International Monetary Fund’s endorsement of her Budget and the OBR’s confirmation that the government will meet its fiscal rules two years early ‘should give confidence to investors that we have a plan to secure our public finances’.
Non-dom effect
To assess the Budget’s impact on the UK’s competitiveness, we will have to wait for the final legislation implementing the replacement for the scrapped ‘non-dom’ regime.
‘Increased capital gains tax could diminish the attractiveness of business investments’
The government’s stated aim is to make this an ‘internationally competitive residence-based scheme’. Before the Budget, Reeves was warned by former Bank of England chief economist Andy Haldane that her plan to close the non-dom tax loopholes may cost the government money rather than raise the £1bn a year Labour hoped if it leads to an exodus of wealthy individuals from the country.
Increased capital gains tax (CGT) raises the tax burden for individuals selling business assets. This ‘could diminish the attractiveness of business investments, particularly for short- to medium-term exits’, according to Simon Thomas FCCA from chartered accountancy firm Ridgefield Consulting.
SME disappointment
Marie Hensfield FCCA, an accountant at Sherwin Currid, says most small businesses will be disappointed with the Budget, particularly the increase in CGT rates for entrepreneurs, known as Business Asset Disposal Relief. She adds: ‘One potential silver lining is a boost for the freelance contractor market, as higher employer NI will encourage big business to tackle IR35 and explore off-payroll engagements.’
The changes to NI will present risks to job creation, increasing the cost of employment
Small businesses will also be concerned about the double whammy of higher employer NI and an increased National Living Wage. The Financial Times’ Stephen Bush acknowledges that this combination is ‘increasing the disincentives for businesses to hire people in the UK. And that’s before you throw in a set of labour market reforms that make it harder to fire people.’
Glenn Collins, ACCA’s head of policy, says the changes to NI will present risks to job creation, increasing the cost of employment, ‘but the Employment Allowance may offset these costs for the smallest businesses, taking some of the sting out of the announcement’.
Elsewhere, lowering the income threshold on Making Tax Digital (MTD) for income tax self-assessment will also raise costs to the smallest businesses.
More complication
Reeves’s first Budget all hangs on future growth. The government is placing a big bet that the extra spending on public services, its planning reforms and industrial strategy will be enough to move the dial on GDP.
One possible positive in the long term, says Ashley Goldsmith FCCA, senior product manager at Caseware UK, is how any extra tax revenues will be spent. For example, if they’re ‘directed to fund improved public services and infrastructure, this may encourage businesses to invest in longer term projects’.
The tax landscape is already complex and a long-term approach to simplifying this is necessary to support investment. Gemma Gathercole, ACCA’s strategic engagement lead (England), says that the Budget has added yet more complication when the government could ease HMRC’s workload and tax-gathering capacity to encourage ‘innovation, economic growth and support a robust tax take by removing barriers to compliance’.
We are in the highest sustained level of public spending in history
The government has inherited significant challenges with a lack of economic growth, the Covid pandemic bill and an ageing population (which means, for example, that the state is spending the same on pensions as it is on defence, transport and policing combined). Labour supporters say that the government has been honest about the fiscal reckoning and inflating tax burden from having fewer working-age taxpayers to meet the costs of rising health and care costs.
This was the biggest tax-raising budget for at least half a century, and we are in the highest sustained level of public spending in history. Whether politically popular or not, this is an experiment for the UK to have a much higher tax burden than the country has historically been used to.
Tax and spend is back. Reeves is bringing the UK closer to its neighbours like France and Germany: improved public services funded by higher taxes, and higher investment funded by higher borrowing. Labour has placed all its chips on the population having better living standards and a noticeably better NHS by the time of the next general election.
But according to current projections, the hard-won benefits of growth and investment from the choices in this Budget may not come for decades.
More information
See more Budget coverage from ACCA
