Many Tricks, Few Treats: Rachel Reeves’ Fiscal Tightrope

Patrick Adams, Senior Consultant
30/10/2024


Setting such a significant Budget the day before Halloween is a gift to the headline writers trying to sum up today’s announcements in a snappy short sentence. Will it scare off voters? Frighten off investors? Is it austerity in disguise? Atticus looks beyond the headlines to understand what is really going on.

In her maiden Budget, Chancellor Rachel Reeves faced tough decisions to balance government priorities, adhere to her own spending guidelines, and maintain market confidence. Her response was £40bn in tax rises, mainly targeting businesses and the wealthy, which she argues are necessary steps for a responsible chancellor to take.

These tax increases and revised fiscal rules will fund infrastructure and growth projects aimed at "fixing the foundations” of the UK The Office for Budget Responsibility (OBR) forecasts faster growth this year and next, though it will slow from 2026 onwards. Markets have reacted positively in the immediate aftermath, with UK shares rising and gilt yields falling post-budget.

The headline tax increase is a painful one for businesses as the Budget’s primary tax announcement is to raise employer National Insurance contributions (NICs) from 13.8% to 15% and lower the NIC threshold, which is expected to generate £25bn. Combined with a 6.7% minimum wage increase in April, these changes will drive up business costs, particularly for small enterprises. To offset some of this impact, the Employment Allowance will double, exempting 865,000 employers from NICs next year. While the Chancellor emphasised her commitment to “protect working people” by avoiding income tax, VAT, or NICs hikes for workers, critics argue that rising business costs may lead to reduced wage growth, reduced hours for employees, or higher prices, indirectly affecting employees.

The Chancellor has also outlined a new fiscal approach to fund critical infrastructure, committing £100bn in capital spending over five years, which the OBR projects will boost GDP by 1.4% in the long term. This investment will support carbon capture projects in Northern England and the regeneration of Euston Station.  The Government also plans to fund the National Wealth Fund to support "industries of the future," with over £20bn earmarked for sectors with high growth potential, such as aerospace and life sciences. While she will face criticism for increasing borrowing, most economists agree investment remains essential for improving the UK’s economic growth.

The NHS has received a significant commitment in this Budget; an extra £22.6bn will be allocated to the day-to-day health budget while £3.1bn will be provided for capital investment. This will help tackle record waiting lists, which currently stand at over 7.6 million patients. The funding will support an estimated 40,000 additional weekly appointments, including evening and weekend sessions. This investment aims to stabilise the NHS.   The Chancellor has coupled it with a call for departmental productivity gains across Whitehall, mandating a 2% efficiency savings target across all departments. The aim is to reinvest these savings into front-line services, although some departments may face layoffs.

While health, education, and defence budgets saw increases, overall government spending remains tight. Cuts to the Winter Fuel Allowance highlight the political challenges Labour faces amid economic constraints. The “Fair Repayment Rate,” will play well on the backbenches but others, such as the 2% productivity savings target and bus fare cap increase, will face resistance. Labour’s recent General Election victory, though broad, lacked depth, leaving MPs sensitive to unpopular fiscal moves given many of their narrow majorities.

In terms of Halloween treats, the Chancellor announced the previous government’s income tax threshold freeze will end in 2028. Carer’s Allowance will increase to match 16 hours at the National Living Wage, and Universal Credit repayments will drop from 25% to 15% of the standard allowance. She reaffirmed the pension triple lock, providing a 4.1% increase for 12 million pensioners, equating to £470 extra annually. Fuel duty remains frozen, with the 5p cut extended for another year, avoiding a 7p rise. Reeves also introduced “a penny off pints” for draft alcohol duty, while non-draught duty will align with inflation from February. Additional commitments include continued HS2 funding and pothole repairs.

The Chancellor presented this budget as a "one-year dose of pain" aimed at stabilising the nation's finances, though political and social repercussions are likely to persist. Ominously, she spoke of more complex decisions to come although markets have initially responded positively. However, following Labour’s victory in July, Reeves and Prime Minister Starmer know this is the time they can deploy their supermajority with such force.

While Labour ministers previously struggled to define "working people”, the Chancellor clarified this today by pledging not to increase taxes on most individuals (a manifesto commitment), boosting the minimum wage, freezing fuel duty, and lowering the price of a pint. Most people won’t be hit by today’s measures but at what cost?  By shifting the tax burden to businesses, the Government risks undermining its economic growth goals. Although the investment agenda provides a boost, both spending and projected growth remain modest relative to Labour's ambitions.

This Government will ultimately be judged on whether they can deliver economic gains and repair public services despite the challenges of meeting these ambitions. They will hope businesses can absorb today’s tax rises without too much damage and investments made now will deliver much needed economic growth in years to come.

To find out more about how Budget impacts your business, get in touch with Atticus Partners at: info@atticuscomms.com