More Doom and Gloom? Atticus’ Preview to the Budget

Luca Pavoni, Consultant
29/10/2024

The long-awaited Budget is about to land. The Chancellor's statement tomorrow will serve as a crucial test for a government which is just a few months old but whose honeymoon period has long since passed.

Speaking in Birmingham on Monday, Prime Minister Keir Starmer outlined plans to strengthen the British economy, reform public services, and improve life for working people. He emphasised Labour’s focus on economic stability, infrastructure, the NHS, jobs, public safety, and climate action, aiming to "fix the foundations" for sustainable growth.

The Prime Minister has received heavy criticisms for a pessimistic style of leadership that has appeared, to many, a far cry from his promise to “relight the fires of optimism” in the run-up to the election. He has taken multiple unpopular policy decisions such as doubling down on the two-child benefit cap and stripping millions of pensioners of a winter fuel payment by introducing strict means testing. Alongside a list of controversies affecting Labour MPs (most recently Mike Amesbury, who was filmed launching a seemingly unprovoked attack on a constituent over the weekend), these policies have already left half of Britons disappointed in the Labour Government so far.

Labour needs a good news story to perk up its approval ratings and restore the feeling that ‘things can only get better’ after years of austerity followed by a pandemic and cost-of-living crisis.

The Budget, unfortunately, is unlikely to be that story.

For months, Chancellor Rachel Reeves has forewarned of a £22 billion black hole in the fiscal finances left by the Conservatives. The figure reflects projected overspend of departmental budgets this year, according to an audit commissioned by the Chancellor upon entering office in July. The Shadow Chancellor, Jeremy Hunt (for whom this will likely be his last fiscal statement in post) branded this accusation as “nonsense”, while the non-partisan Institute for Fiscal Studies (IFS) accused both parties of a “conspiracy of silence” regarding the true scale of the fiscal challenges facing the UK in the election campaign.

In either case, the £22 billion figure doesn’t bode well for the Government after it pledged to raise only £8.5 billion in its manifesto and borrow another £3.5 billion, while simultaneously promising transformational investments across the board. The iron-clad election pledge not to raise taxes on working people via the three biggest taxes (income tax, national insurance, VAT) has further tied the Treasury’s hands behind its back. Existing tax rise commitments, including on private school fees and non-domiciles, as well as a renewed pledge to crack down on tax avoidance, will only scrape the barrel.

So where will the Chancellor find the money to fill the black hole and fund Labour's manifesto pledges?

Labour has warned of ‘difficult decisions’ in the Budget. This includes potentially introducing national insurance on employers’ pension contributions to raise £15.4 billion. While the policy is a cunning way to increase taxes without breaching their promise of not raising taxes on ‘working people’, many will see the wordplay as trickery that ultimately still amounts to a raid on their pockets.

The Government is aware each tax rise or cut to services damages its approval ratings. The Winter Fuel Payment cut, for example, triggered an almighty outcry from the public and will only save about £1.4 billion a year.

Far more preferable is to find ways to bend its strict budgetary policy that allows for more borrowing. Speaking at the International Monetary Fund (IMF) in Washington DC on Thursday, the Chancellor confirmed the Budget will include a new method for assessing the UK’s debt position in order to borrow up to a whopping £50 billion for long-term capital investment.

This move gives credibility to ambitious policy papers recently set out by the Government, such as the new industrial strategy laid out by the Business and Trade Secretary, Jonathan Reynolds, as well as Great British Energy’s blueprint for long-term energy infrastructure. The success of these strategies depends on businesses seeing the Government commit with not just words but also cash, and then having the confidence to invest themselves. In that spirit, Reeves’ announcement at the IMF could be the coveted key to getting Britain building and the economy growing.

However, if the Chancellor is not convincing in her justifications, the rewriting of borrowing rules could trigger a far more severe Liz Truss-style backlash from the markets. The Guardian reports of a ‘febrile mood in the financial markets’ and Jeremy Hunt’s warnings of mortgage bill hikes are eerily similar to the same echoed following the infamous mini-budget of 2022. As it is, stock markets have already been spooked by talks of a rise in capital gains tax(taxes paid on assets you sell) and uncertainty from the Budget could deal real damage to businesses and investors.

There is evidently a lot riding on tomorrow’s announcement. Labour has already tripped on a few too many hurdles in its first 100 days in government but the Prime Minister and Chancellor will know better than anyone that there is little room for error in this Budget. The Government has inherited a bleak state of affairs; this much is clear. But voters are long tired of the negative messaging that has thus far clouded Labour’s grandiose promises of ‘Change’. Whether Rachel Reeves will be able to lift the country out of its ‘doom loop’, without repeating the fatal mistakes of her predecessors and maintaining economic credibility, is yet to be seen.