A budget for growth?

At the recent Investment Summit in the US, Rachel Reeves announced a change in the Government’s self-imposed borrowing rules to free up money for the government to invest and jump start the economy out of what she referred to as the low investment, low growth, ‘loop of doom’. Whilst cautioning about the impact of rising debt (on inflation, interest rates and government debt repayments), the IMF was supportive noting the UK’s underinvestment in recent years compared to other G7 economies.

So does the Budget kickstart growth and transition us towards a loop of investment, international competitiveness, higher tax revenues, public spending and ultimately wellbeing?

The Chancellor went into the Budget having managed business and market expectations well – evidenced by the muted response of the financial markets to today’s announcements. There was an expectation of tax rises and very few incentives likely to be on offer to businesses. This was borne out by changes announced to employer national insurance (rate increased to 15% and threshold lowered from ￡9.1k to ￡5k), the increase of the National Living Wage by 6.7%, the immediate increase to Capital Gains Tax rate (10% increased to 18% and 20% increased to 24%), and the changes to the Energy (Oil and Gas) Profits Levy, raising the level to 38% (meaning the total headline?rate of tax will be 78% for the upstream oil and gas sector).

It was the retail, hospitality and leisure sector that looked to be the main beneficiary from the small tax incentives that were on offer. The current 75% discount to business rates will be replaced by a discount of 40% - up to a maximum discount of ￡110k. Whilst this lessens the blow of a steep transition from the current discount to no discount, it still means that many businesses will see their business rates increase by nearly double. This sector had been campaigning vigorously on this matter, setting out a disadvantage to the online sector.?

However, there was some good news on offer too with the Government keen to paint a more optimistic forward-looking picture and move on from the tax announcements. We knew ahead of the Budget that the Chancellor was proposing to change the fiscal accounting rules – specifically the self-imposed rule under which borrowing must be falling in the fifth year of any economic cycle. Changing the definition to using public sector debt net of financial liabilities (PSNFL), under which investments such as the Government's student loans book are defined as assets rather than liabilities, gave the Chancellor more to play with (c￡16bn of reported headroom by the final year according to OBR). Since she retained the second fiscal rule under which day-to-day spending must be funded from government revenue (not borrowing), this led to much of the additional borrowing being pointed towards infrastructure projects.

The Chancellor confirmed that the UK Infrastructure Bank (UKIB) would be transformed into the UK’s National Wealth Fund with a broader remit to crowd in private sector investment into specific sectors and technologies critical to UK green energy and growth ambitions and investment commitments from large multi-nationals including in energy, data and digital and healthcare. Alongside this is the pledge to protect government investments in research and development "to unlock these growth industries of the future" with more than ￡20bn of funding, including at least ￡6.1bn to protect core research funding for areas like engineering, biotechnology and medical sciences. Specific funding that was announced included:

-??????? ￡1bn in aerospace development

-??????? ￡2bn automotives – including electric vehicles and manufacturing

-??????? ￡520m for a new life sciences innovation fund

-??????? Additional tax relief for film and tv.

-??????? ￡500m for reliable and fast broadband across the country including rural areas, which is likely to be of particular benefit to small and mid sized companies but also as an enabler of some of the Government's flexible working rights.

-??????? ￡500m in new funding for the Affordable Homes Programme to boost the delivery of new social and affordable homes

-??????? 11 new green hydrogen projects across the UK, first large-scale commercial operations in the world

-??????? Additional ￡3.1bn of funding to capital budget for hospitals

With the key theme of the budget being ‘invest, invest, invest’ to drive growth, the focus on infrastructure is very welcome, with additional funding announced for core areas of our communities including school and hospitals. It will now be key to ensure that value is delivered from this spend and it is effectively controlled. As anticipated, it was also good to have confirmation that HS2 will go to Euston and not terminate at Old Oak Common. There was no mention of the approach to HS2 north of Birmingham, despite multiple options being muted in recent months, this will no doubt need to be considered in Phase 2 of the Spending Review in Spring 2025.

Overall, the Government plans to invest ￡100bn in capital spending over the next five years. To ensure that this investment is occurring “prudently alongside business” the Government proposed four guardrails requiring national bodies, including the National Wealth Fund, to target a return on investment that is at least as high as gilts; strengthening infrastructure delivery capacity and controls; capital budgets set for five years at a time; and greater transparency on financial reporting with audited accounts from NAO and made available to OBR.

These initiatives underpin Invest 2035: The UK’s Modern Industrial Strategy which sets out plans to boost UK productivity from the bottom to the top of the G7 ranking and improve the UK’s competitiveness.

As was expected, the cost of government borrowing did rise slightly in advance of the budget in expectation of the additional government borrowing. However, the reaction of the financial market was largely mixed and there appears to be some confidence that the Government’s investment gamble may pay off and the benefits from growth will outweigh the inflationary pressures and higher government debt repayments. ?This was reinforced by the OBR who predict that real GDP growth will rise from 1.1% in 2024 to 1.6% in 2029 with borrowing as a share of GDP falling from 4.5% to 2.5% over the same period.

Whether this turns out to be correct though, and moves us towards ‘restoring economic stability’, depends on whether businesses optimism is boosted (Grant Thornton’s most recent Business Outlook Tracker showed pre-Budget confidence to be at a three-year low) and they can access some of the additional funding available – both necessary conditions for investment and growth. Only through this growth will the Government be able to pay back the debt, increase spending on public services and raise living standards. Given the OBR's positive growth forecasts off the back of the budget, businesses and consumers alike may have at least some reason to feel positive about the future.

You can also read Grant Thornton’s full response to today’s Budget here.

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