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Good afternoon. Chancellor Rachel Reeves finally delivered her long-awaited Budget and despite all the leaks and pre-briefings the scale of the tax rises on business and the lack of emphasis on Labour’s supply-side reform plans have attracted negative comments.
The very short version of the Budget is a whacking great rise on employers’ national insurance to fund more health and education spending, which leaves little headroom in the coming three-year spending review for other so-called “unprotected” departments.
So while the OBR did forecast that increased capital spending would lead to the economy being 1.4 per cent larger in roughly 50 years (0.4 per cent in 10 years) the growth outlook for this parliament is about flat, after a couple of years of short-term, public-sector induced growth.
And as the Office for Budget Responsibility, the fiscal watchdog, notes in its economic outlook spending in so-called “unprotected” departments will actually fall by 1.1 per cent after 2026. As the OBR observes:
“This includes departments responsible for policy areas where the government has significant policy ambitions, including tackling climate change, addressing rising economic inactivity, and increasing housebuilding.”
For those hoping for supply-side reforms, like better planning, lighter regulation and more infrastructure investment, the focus on an old-fashioned tax-and-spend splurge on the public sector areas of health and education raises questions about Reeves’ commitment to the “modern supply side economics” she promised.
Some positives
On the plus side, despite the fears raised by the scientific community, the R&D budget was protected, with £20.4bn to underpin the broader commitment to innovation and there were several nods to the coming industrial strategy.
Public sector net investment will return close to OECD levels, averaging 2.6 per cent over the parliament, which is the highest five-year average since the early 1980s, according to the Resolution Foundation.
Drilling down, it was also clear from the budget documents that Cambridge is going to be one of the government’s big bets in the coming industrial strategy, with East West Rail — the old ‘Varsity Railway’ connecting Oxford and Cambridge via Milton Keynes — among the accelerated capital investments.
Reeves also confirmed “long-term funding for growth-driving sectors” as part of the government’s industrial strategy, including £975mn over five years for aerospace, £2bn for the automotive sector and “up to £520mn” for a new Life Sciences Innovative Manufacturing Fund.
But these are relatively small sums of money if the conditions are not created for driving private sector investments, which is where investors have expressed misgivings about the balance of this Budget.
Crowding out the private sector
Sir Nigel Wilson, the former CEO of Legal & General, warned that the Budget, far from “crowding in” private sector investment, would crowd it out rather than liberating the £60bn-£80bn in private sector investment he estimated was available to drive growth.
“There weren’t really any plans about housing; there weren’t really any plans about energy,” he told the BBC. “In terms of our growth businesses, this won’t be very positive for them, because they’re sitting there thinking ‘everything has gone up for me’.”
Take housing. Labour has promised to build 1.5mn homes in this parliament — a target that almost everyone in the sector believes is unachievable, yet it is a key goal for planning reform, skills policy and growing construction supply chain capacity.
Boosting affordable housing is one of the government’s main levers to get this ambition moving, but the £500mn that Reeves announced in the Budget is still only what one Whitehall official called a “drop in the ocean” when set against what’s needed to make a difference.
The last Affordable Homes Programme, which runs from 2021-26, was £11.5bn but battles are already being drawn in Whitehall over the need for a really significant hike of that programme in order to create demand, expand supply chains and underpin demand for productivity-boosting off-site modular house construction.
That will be a very tough ask given how tight the conditions are for the next spending review. The Resolution Foundation calculates that the “spending envelope” for day-to-day spending on public services between 2025-26 and 2029-30 implies “£10.8bn of real per-person cuts to unprotected departments”. That’s a return to 2015-16 levels.
And who will train all those construction workers? There was £950mn for skills capital spending alongside an additional £300mn for day-to-day FE college spending, which is barely enough to cover the incoming ‘bulge’ of 16-18 year olds, per Institute for Fiscal Studies calculations.
The Association of Colleges welcomed the relatively small cash boost, but warned that it wanted the government to “set out an investment plan for the next three to five years”. Not unlike the housing department, it will find the headroom is very tight.
In summary, as mentioned last week, the pressure is now on for Whitehall departments to lash together (and fund) a raft of policies — industrial strategy, skills reform, planning reform, new towns, regulatory reform — that Labour hopes will drive growth.
The OBR is sceptical this will happen. Its growth forecasts for 2026, 2027 and 2028 imply that the additional £70bn a year in spending announced by Reeves will actually crowd out productivity-enhancing private sector investment and growth.
Reeves must hope the OBR is wrong or — as the OBR also observes — given the tightness of the future spending settlement, history suggests there is a good chance she’ll be back for more.
FT reporters and commentators will tomorrow discuss what the Budget means for borrowing, public services, growth and taxes in a special subscriber-only webinar. Register for free.
Britain in numbers
This week’s chart is a familiar one — and a reminder that the OBR has still not revised its assessment of Brexit impacts, which shows UK trade intensity (imports and exports as a share of GDP) falling by 15 per cent in the longer term.
There was a delegation of MEPs in London this week trying to read the runes in Whitehall about London’s intentions on the EU-UK reset. But they encountered the same wall of caution and caginess that is frustrating other stakeholders.
The expectation is the EU-UK summit will now be late in the first quarter of 2025, but very possibly early in the second quarter, at which point the UK will set out its ‘asks’ from the EU, likely leading on security where the territory is less contentious.
Even though officials in the Treasury and the trade department talk about how improving trade performance is key to the Reeves growth plan, expectations for the trade reset with the market that accounts for 50 per cent of UK trade remain very low.
That of course begs the question — if the OBR growth forecasts are correct — whether the Labour leadership will soften its Brexit red lines in order to get deeper EU single market access in a bid to drive growth.
We’ll see. I’m sceptical, since the history of Brexit shows that narrow domestic political considerations (on immigration, for example) constantly trump economic ones.
And even if the Labour leadership did shift mid-parliament, by that time any hope of improvements feeding through to the real economy ahead of a 2029 election would have vanished. That, in turn, will fuel the internal political argument for caution.
The time to build momentum on areas that could actually help, like youth mobility, or even the kind of professional services mobility agreements the UK has brokered with the Swiss and more efficient electricity trading, is now.
The risk, as both sides draw battle lines over fishing rights and sandeels, is that — to quote one EU Commission official — the ‘reset’ is turned into an “FCDO sideshow”. Maybe the OBR’s growth forecasts will concentrate minds.
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Publish date : 2024-10-31 10:00:00
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The post Businesses have Budget misgivings first appeared on Love Europe.
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Publish date : 2024-11-01 10:16:11
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