Reform Analysis: Autumn Budget 2024

The Government billed it as the growth Budget. The Chancellor stood at the dispatch box today and told us she was catalysing investment. We were promised that “working people” would be protected. The OBR takes a different view .

“Budget policies temporarily boost output in the near term, but leave GDP largely unchanged in five years”, is the verdict of our fiscal watchdog, “Taken together, Budget policies leave the level of output broadly unchanged at the forecast horizon.” Ouch.

Reeves in her speech told us “we will unlock private investment”, yet the OBR’s assessment is that “the net impact of Budget policies lowers business investment”.

Perhaps worst of all, the OBR predicts that the Budget measures will lead to lower real earnings growth and lower real household disposable income by the end of the forecast.

As many had pointed out ahead of today’s statement, a rise in employers NI is in effect a tax on “working people”. The OBR confirms this: “We assume this lowers real wages and profits, and workers and firms reduce labour supply and demand in response”.

Strikingly, while the static value of the 1.2% increase in the rate and almost halving of the threshold is ￡26.4 billion in 2029-30, a full ￡9.6 billion is lost due to behavioural effects, and a further ￡5.9 billion has to be netted off the tax take to cover the cost to the public sector. Or in other words, the value to the exchequer is actually less than half the headline, at the cost of poorer working people and a lower participation rate.

There is a glimmer of positivity, with the OBR saying that, if sustained, the changes would deliver a “net boost to the supply side of the economy in the 2030s”. However, that has to be read in the context of a potential change of government (who knows what the next election will bring) and a whole host of uncertainties making the forecasts liable to change. In fact the words uncertain, uncertainty and uncertainties appear 79 times in the OBR’s report.

In terms of taxation, spending and borrowing: at the end of the OBR’s 5-year forecast taxes remain up (”a historic high”), while spending as a percentage of GDP will be marginally lower and borrowing, while falling more slowly than previously forecast, will also be down (largely due to those taxes). I’d like to tell you that this might change at the Spring Spending Review, but the Chancellor has the set the spending envelopes, so we await the detail not the budget.

There’s a whole host of detail, from an eye-watering cash injection in to the NHS (sans that reform we were promised, remember last month when the PM said "Hear me when I say this — no more money without reform"?) to new fiscal rules, public sector capital spend to a mixed bag on local gov. Read on for the Reform team’s usual analysis of the good, the bad and the jury’s out.

Good for:

Smarter fiscal rules

The budget treats us to another update to the fiscal rules: with a rebranded “stability rule” and “investment rule”.

The stability rule resembles the ‘golden rule’ used by previous governments, meaning day-to-day spending must be met with tax revenues by 2029-30 (and then on a three-year rolling basis), while allowing government to borrow to invest.

This offers more flexibility to invest than the previous rule, which required net borrowing to be less than 3% of GDP by the end of the forecast. The new three-year time horizon also keeps governments more honest about debt falling, rather than passing it on to become someone else’s problem (even if, would you believe it, it still kicks in at the end of the Parliament!).

At the same time, this rule is more sensitive, as the OBR says, to “movements in interest rates and inflation given the level of debt”. A particular issue in this budget, since the ￡9.9 billion of headroom is the third lowest since 2010.

The “investment rule”, meanwhile, requires government to reduce net financial debt as a proportion of GDP (also with a five-year, then three-year rolling target date). Crucially, this new definition of debt — public sector net financial liabilities (PSNFL) — will capture both the “expected returns” of financial assets as well as debt owed. This broader measure of the government balance sheet means, for example, that student loans and financial assets held by public sector pension schemes, will be less of a constraint to government pursuing other, growth-enhancing investment opportunities.

At Reform, we think these are broadly an improvement on the previous set of rules.

Both are set out in the Government’s new Charter for Budget Responsibility , also published today, which governs the OBR’s mandate to produce regular forecasts, and its relationship with the Treasury.

School estates

The scale of the public sector estates maintenance backlog is mind-boggling, something the recent RAAC scandal shone a light on. Today the Chancellor attempted to rectify that by substantially boosting the capital budget for education. This had two key elements: ￡1.4 billion for rebuilding schools and ￡2 billion for maintenance.

Around 24,000 school buildings (38% of the total) are beyond their estimated initial design life . This includes 10,000 buildings constructed before 1940. And around 700,000 pupils (8.3% of pupils at the time of report) are learning in a school that requires major rebuilding or refurbishment. The DfE recommended ￡5.3 billion a year as the capital funding required to maintain schools, and some estimations have the overall backlog at ￡11.3 billion . The baseline capital allocated to DfE is ￡5.5 billion in 2024-25 and ￡6.7 billion in 2025-26 — so not quite enough, especially with other capital expenditures, but definitely an improvement.

Nevertheless, spending this money effectively will require sustained focus from the DfE. It is important that the Budget split up maintenance and rebuilding — the National Audit Office found that exclusively spending money on the poorest condition buildings would not deliver best long term value for money. Departments are also bad at spending capital budgets, and DfE currently lacks comprehensive information on the extent and severity of potential safety issues across the school estate. So money being made available is positive but, as ever, how it is spent is the key.

Reducing the elective backlog

Health has been allocated a wide range of capital injections — something that is widely considered a necessity as NHS productivity plummets and waiting lists increase. There is a big hospital focus (which is explored more below), but is an unavoidable fact of health systems that secondary care diagnosis and treatment is mind-numbingly expensive, so reducing the elective backlog was always going to require cash.

Allocating ￡1.5 billion for surgical hubs is smart: generally delivering high volume low complexity procedures, they carry out 22% more operations than regular surgical theatres. They are located on existing hospital sites, but are separate from other departments and their beds ringfenced. About half of the waiting list require surgical care .

Allocating money for more beds, however, is less smart. Bed occupancy is a well-known problem in hospitals, but that isn’t necessarily because the raw number of beds is too low, but because we are poor at getting people out of those beds. Bed occupancy is a symptom of a problem — which is inefficient patient throughput in hospitals. One way of improving patient flow however, is through better technology. So it’s positive that the Budget allocated ￡2 billion for tech infrastructure… of course implementing this in a famously fragmented health system remains a perennial challenge.

House building

The UK’s chronic housing shortage is one of the biggest challenges facing the country. As it reaches crisis point, we at Reform are pleased to see the Chancellor gripping the issue, with a commitment of at least ￡5 billion to delivering more housing in 2025-26. Encouragingly, the measures announced to support the building of homes span the public and private sector. An “additional ￡3 billion of support” was allocated for SME housebuilders, through access to lower-cost loans, to deliver tens of thousands of new homes.

Supply of houses is one thing, affordability is another. The Chancellor’s specific emphasis on delivering affordable housing was encouraging: this came in the commitment of an additional ￡500 million for the Affordable Homes Programme to deliver an extra 5,000 affordable homes. Strings were attached to the confirmation of numerous house building projects, such as the delivery of 3,000 energy efficient new homes across the country, with a stipulation all these homes will be affordable ones.

To help protect the social housing stock, discounts on Right to Buy schemes will be reduced, disincentivising the purchase of council housing by tenants, and councils in England will now keep all the receipts from these sales, facilitating reinvestment of the profits into more social housing. A new long-term social housing rent settlement looks close to confirmation too – CPI+1% for 5-years – which would provide certainty for social housing providers, hopefully giving the sector the confidence to build tens of thousands of new social homes.

Transport infrastructure

A key enabler of growth is well-placed transport infrastructure. It improves labour market access, business productivity, and brings in investment to connected areas, which makes the Chancellor’s announcement of investment in England’s railways very welcome.

Two of the major national announcements include the Transpennine Route Upgrade between York and Manchester which will improve northern rail connectivity (and “lay the ground for Northern Powerhouse Rail”) and the East West Rail, connecting Oxford, Milton Keynes, and Cambridge, key to supporting the life sciences cluster. In addition, the City Region’s Sustainable Development settlement will put more money in the pockets of Metro Mayors to invest in regional transport projects. And, unusually, towns, villages and rural communities will not miss out with over ￡650 million promised for progressing transport-related Levelling Up projects (apparently more detail to follow on this).

In addition, it is encouraging to see the Budget explicitly outline that investment in big rail projects will come hand-in-hand with housing. For example, support for housing comes alongside the East West Rail in Cambridge, indicating a systems-wide approach to investment.

However, it is not all rosy in the transport sector — scroll down for the ‘bad for’ side of these announcements.

Bad for

Passenger’s pockets

Here’s the ‘bad’ side of the transport announcements… While we’re going to get better connectivity, we’re also going to have to pay more (much to the delight of all those travellers consistently experiencing delays and cancellations). The Government have announced that rail fares will increase by 4.9%, the price of rail cards by ￡5 (or 17%), and the bus fare by ￡1. “Working people” are going to feel that in their pockets.

The Department for Transport’s budget has also been slashed (a ￡1.2 billion cash increase between 2024-25 and 2025-26 is a 2.5% real terms cut). The Budget document outlines that the “negative” growth rate is “due to the reduction to the rail services subsidy as passenger numbers continue to recover post-pandemic”. In fact, public transport use has remained below pre-pandemic levels . Increasing the cost of already international comparatively expensive travel does not seem like the way to increase passenger numbers.

Immediate spending pressures

Day-to-day public spending is going up, though less than it would appear, and the lion’s share is going on NHS and schools. But this means that wider spending, particularly resource spending, is under pressure.

Total departmental spending is going up, by nearly 4.3% in real terms between 2024-25 and 2025-26. Within that, most of the growth is from capital spending — which increases by 9.9% over the same period.

There is much less growth in resource spending. Resource budgets will grow by 2.9% in real-terms in 2025-26, but that includes additional compensation for the impact that the employers NICs rises will have, and the pressures from higher public sector pay awards. And the majority of that rise is going into the NHS and schools, with real-terms cuts for many departments to offset it — as ever, the 2% efficiency and productivity saving (applied across the board) will be doing a lot of work.

Perhaps the hardest hit is the Home Office, facing a 3.6% real terms cut, predicated on “significant savings to the cost of the asylum system”. The Treasury’s own process identified a massive additional ￡7.1 billion of pressures on the Home Office above their budget for 2024-25, including from asylum costs, and it is hard to believe those can be sustainably reduced in a single year.

Non-NHS health provision

The Chancellor has substantially increased the Department for Health and Social Care’s budget, but rather than going to the health?and care?system, it is, once again, swallowed by the NHS. Whilst we hope that this might improve the performance of an NHS ‘on its face ’, it still fails to tackle two critical components of the health and care system: social care and public health — the former of which is funded by local government and the latter by DHSC. And without giving proper consideration to these key areas, we at Reform wonder how much impact this budget can have on the nation’s health.

The social care sector is allocated an additional ￡600 million of grant funding for next year, compared to a whopping ￡22.6 billion additional for the NHS over the next two years. And it is nowhere near enough to help fix and prevent the burgeoning crisis in social care. Last year, the Health Foundation calculated that to meet future demand and cover the full cost of care by 2024-25, the sector will need ￡5.4 billion in funding. What’s more, given that increases in employers NICs and the minimum wage will increase provider cost (78% of the social care workforce work for independent sector employers ), the ￡600 million grant will be even less impactful.

This goes for public health too. There is only one mention of public health in the Treasury’s document, and it is not even to do with the public health grant. Given that the Chancellor echoed the Health Secretary’s slogan shifts of ‘hospital to community’ and ‘sickness to prevention’, this is a pretty big omission.

Primary care

Given how much of a difference capital investment makes to productivity, the increase for the NHS is generally positive. But the continuing prioritisation of hospitals is less so. Of the ￡13.6 billion of capital investment, at the very least, ￡2.5 billion will be focused on secondary care, and an undetermined (subtext: very large) amount will be spent on delivery of the New Hospitals Programme, which is already projected to cost ￡22.2 billion in total.

Despite repeated intentions to move care into the community, the only announcement for primary care was the creation of a capital fund to upgrade 200 GP surgeries. For context, 2,000 premises have been identified as not fit for purpose. In our recent paper, Prescription for Prevention: A new model for primary care , we outlined how private capital could be used to revitalise the primary care estate, a sentiment also echoed by the NHS Confederation .

With an almost unprecedented cash injection to the NHS capital budgets, this feels like an enormous missed opportunity for the flailing primary care estate and its technology infrastructure.

Jury’s out:

Local Government

If English Local Government was hoping for an end to its ongoing financial crisis today, it will have been disappointed. Perhaps the OBR says it best : “pressures on local authority finances remain a substantial risk to our forecast”. ￡1.3 billion in new grant funding is promised for the next financial settlement, including the ￡600 million for social care. To put that in context, the actual sector-wide funding shortfall is estimated by the LGA to be ￡2.3 billion for next year, while some analysis suggests it could get as high as ￡8.5 billion by 2027. A discussion paper on reform to Business Rates is interesting, but does not suggest anything particularly radical. The promises to continue consolidating grants and set up multi-year settlements are both mentioned, but they are not here yet. So the financial sticking plaster is here to stay, at least for the time being.

Signs are better for devolution. At the regional scale, the ‘trailblazer’ integrated funding pots are confirmed for Greater Manchester and the West Midlands for next year. We also have confirmation that, from 2026-27, this power will be extended to Combined Authorities in the North East, South and West Yorkshire, Liverpool, and — possibly! — London. Intriguingly, reports this week that the Government would be at least dipping its toe into deeper reorganisation of the structure of local government have been reinforced today, with a promise of “working with councils to move to simpler structures … with efficiency savings from council reorganisation”. Grab your popcorn now.

A familiar friend

Well, if it isn’t the Treasury’s beloved 2% efficiency target for departmental spending back in the red book.

We’ve previously criticised the flawed logic of applying the same, blanket target across departments, rather than thinking in the round about the savings that government can deliver. Aside from a new Office for Value for Money to help drive the initiative, this Budget is unfortunately no more creative in its approach to achieving productivity gains and reducing waste.

We’re also told that more than ￡2 billion will be raised over five years by the DWP getting serious about fraud and error in the benefits system. And that HMRC will be “modernising its systems” to close the tax gap (as ever). A familiar friend, but perhaps not the most believable one…