Business Sweden insight: the new Labour government’s first fiscal event – a historic “once in a Parliament budget”

When she took to the despatch box yesterday, Rachel Reeves delivered a historic Budget as Britain’s first-ever female chancellor. Framed against the challenging economic inheritance from the former Conservative government, Labour’s first Budget in 14 years sets the UK tax take as a share of GDP to a historic high of 38.2%, alongside a steep increase in borrowing.

Following Labour’s resounding victory in July’s General Election and clear mandate for change from the electorate, Chancellor Reeves started her speech focusing on pressures on the public finances and “broken” public services. Given Labour’s core mission of growing the economy, she focused the Budget on restoring economic stability and “fixing the foundations”.

Many of the Budget announcements were of course relevant for Swedish-linked businesses active in the UK market irrespective of industry or sector. These include the increased rate of employer National Insurance to 15% from April 2025 alongside lower thresholds – a major tax change raising almost ￡26bn by the end of the decade – as well as the recommitting to the 25% Corporation Tax rate during the current Parliament in a Corporate Tax Roadmap.

In this insight-piece, Business Sweden’s team in London considers some of the central announcements in the new administration’s maiden fiscal event of relevance to our key industry practices: healthcare and life science, energy, and defence / security.

The economic outlook

In its official forecast accompanying the budget, the independent Office for Budget Responsibility (OBR) expects real GDP growth at 1.1% this year, 2.0% in 2025, 1.8% in 2026, after which it is expected to fall back to around 1.5% towards the end of the Parliament. The OBR estimates the Budget policies will only deliver a temporary GDP-boost of 0.6% in the near term, but finds that if the increased public investments levels were sustained, this would permanently increase the supply capacity of the economy. Over the forecast period, business investment is expected to fall as a share of GDP as profit margins are tightened, while the OBR anticipates CPI inflation to pick up to 2.6% in 2025.

Healthcare and life science clear winners in the Autumn Budget

With an additional ￡22.6bn in the health budget to bring down waiting lists, coupled with an ￡3.1bn increase in the capital budget over two years, the NHS is one of the main beneficiaries in the Autumn Budget, alongside schools. Coming off the back of the independent Darzi review on the state of the NHS, the new funding includes ￡1bn for a backlog of NHS repairs and upgrades and ￡1.5bn for new hospital beds, diagnostic tests and new surgical hubs and diagnostic centers. The Chancellor also confirmed the review into the New Hospital Programme of seven hospitals will be published in 2025.

As part of its modern Industrial Strategy (Invest 2035), the budget also confirmed multi-year funding commitments for several identified sectors with the biggest growth potential – including up to ￡520mn for a new Life Sciences Innovative Manufacturing Fund. On Research and Development, the Chancellor outlined ￡20.4bn in protected R&D funding in 2025-26, including fully funded association to Horizon Europe, the EU research and innovation funding programme.

On tax, the Government announced measures to disincentivise activities causing ill health, such as the tobacco duty escalator, a new vaping duty and an increase in the Soft Drinks Industry Levy.

Measures to support the clean energy superpower-mission

As a “mission-driven” government, making Britain a clean energy superpower is one of Labour’s five missions. With the new publicly-owned company Great British Energy (GBE) at the heart of this mission, yesterday’s settlement includes ￡100mn in capital funding to kick-start GBE’s clean energy project development and ￡25mn to establish it as a company. The Budget also confirmed:

• ￡3.9bn for the first carbon capture and storage (CCUS) clusters in the UK
• ￡2.7bn of funding to continue the development of Sizewell C in 2025-26 (with a final investment decision to be taken in the second phase of the Spending Review)
• ￡1bn next year for the Warm Homes Plan – with an initial ￡3.4bn guarantee of investment towards heat decarbonisation and household energy efficiency between 2025-26 and 2027-28. The Government is also providing funding to grow the heat pump manufacturing supply chain in the UK to support the plan
• An increase in and extension of the Energy Profits Levy on oil and gas companies to 38% until 2030, which alongside higher air passenger duty rates raises ￡3.6bn by 2029-30. ?

Funding commitments for defence and security

With the Government’s “root and branch” Strategic Defence Review into UK Defence due to be published next year, the Chancellor confirmed a total increase of the Ministry of Defence budget of ￡2.9bn during next year. This funding will go towards modernising the Armed Forces, the UK continuing to play a leading role in NATO, as well as guaranteeing continued support to Ukraine (￡3bn per year “as long as it takes”).

In terms of Labour’s manifesto commitment to spend 2.5% of GDP on defence, the path towards this will be set out at a “future” fiscal event. As the OBR notes, this is a significant spending ambition estimated to cost an additional ￡17bn in 2029-30.

In addition, as defence is one of the eight identified growth-driving sectors in the modern Industrial Strategy green paper, it is interesting to note that the Budget also confirms ￡975mn for the aerospace sector to fund vital R&D and industries in the East Midlands, South-West and Scotland over five years.

Business reacts to Labour’s budget – a mixed response

Unexpectedly, leading UK business organisations such as the CBI, IoD and BCC agree that the Autumn Budget is “tough” for business, pointing to the increased tax burden. Meanwhile, protections for smaller business have been welcomed by the FSB and BCC (see the table below for further details).

In addition to business bearing the brunt of the direct cost of the biggest tax-raising Budget since the early 1990s, companies face further pressure from the increase in the national living wage from April next year also announced yesterday, as well as the Government’s separate employment law reforms (expected to cost up to ￡5bn a year). Although the Chancellor referred to the Budget as a “once in a Parliament”, it is clear from the OBR forecast that it will not transform UK economic growth and neither Reeves nor Prime Minister Sir Keir Starmer has closed the door on future tax hikes.

Business Sweden is keen to better understand how your company is affected by the budget. To discuss the impact and / or areas of growth for your operations in the UK market, do get in touch with Business Sweden’s Trade Commissioner for the UK and Ireland, Gustaf Bergstr?m, or Susanna Silversol, Public Affairs Lead, UK.