The Budget

Thought for Thursday

“You can always amend a big plan, but you can never expand a little one. I don’t believe in little plans. I believe in plans big enough to meet a situation which we can’t possibly foresee now.” – Harry S. Truman

The Budget

Headlines continue to be dominated by yesterday’s Budget and the subsequent market reaction. As was widely reported in the run up to the event, the Chancellor Rachel Reeves announced some ￡40bn worth of tax increases alongside a ￡22.6bn increase in day-to-day spending.

Speaking to the House of Commons, Reeves maintained that the decisions taken “are the right choices for our country. To restore stability to our public finances. To protect working people. To fix our NHS. And to rebuild Britain.”

As we looked at yesterday, the ￡40bn worth of tax rises will likely raise the tax burden from 36% to 38% - its highest level in modern day peacetime Britian. As the BBC’s Faisal Islam wrote, this represents “one of the very largest tax rising Budgets outside of a time of recession”, with most commentators seeing it as the biggest tax rising budget since 1993.

One of the key announcements was the increase in employers’ contributions to national insurance which will rise form the current level of 13.8% to 15%. While this had been widely expected, what was less expected was that employers will pay NI contributions on any earning’s above ￡5,000 (considerably lower than the existing ￡9,100 level).

Speaking on BBC Radio 5 Martin Lewis said of the increase that "We need to be honest here, that cost will either be met out of profits - unlikely, increasing consumer charges - possible, or decreasing future benefits and salaries for employees - possible".

Sharing such concerns, the founder of Lastminute. com told The Telegraph that the hike will “make people think more about hiring more people and where to hire them”.

As such, while the Labour Party Headquarters are keen to reiterate the party line that the government will “not raise taxes on working people”, critics argue that the tax could indirectly affect working people.

Reeves maintained that the increase in tax was necessary to raise an extra ￡25bn per year by the end of the forecast period and speaking on a podcast later in the day indicated that it was preferably to raising other forms of tax such as income tax.

The Chancellor also announced that Capital Gains Tax (CGT) will increase from 10% to 18% for those paying the lower rate, and 20% to 24% for those paying the higher rate. According to the OBR such changes will raise tax receipts by ￡2.5 billion by the end of the forecast period. This comes alongside a tax on private school education and abolishing the Non Dom tax status.

Meanwhile, as was widely expected The National Living Wage for those over 21 will now rise 6.7% next April to ￡12.21, marginally more than the Low Pay Commission’s recommendations to hike it to ￡12.10. Generally speaking this will mean that a full time worker on the NLW will see a pay increase of ￡1,400 per year. The announcement will come as welcome news to the 3m people on the NLW.

Furthermore, against rising fears of fiscal drag, the Chancellor also confirmed that Income Tax and National Insurance Contributions thresholds will be unfrozen from 2028-29 onwards.

Reeves also assuaged fears that Fuel Duty could be raised for the first time in 12 years, by confirming that the existing 5p cut would be maintained for another year.

Alongside the Budget, the OBR indicated that Real GDP is expected to increase from close to zero last year, to 1.1% over 2024 ahead of rising to 2% in 2025. By 2026 however, Real GDP growth is expected to ease to 1.8% in 2026, falling further to 1.5% in each of the following three years year.

Importantly, while the OBR have upwardly revised their growth forecasts for 2024 and 2025 by average of 25bps given what they describe as the “net fiscal loosening in this Budget”, the body then expects growth to weaker between 2026 and 2028 as “these temporary effects fade”.

The full transcript of the Chancellors budget can be found below:

https://www.gov.uk/government/news/chancellor-chooses-a-budget-to-rebuild-britain