Rachel Reeves, the chancellor of the Exchequer, will deliver the new Labour government’s first budget at 12.30pm on Wednesday 30 October. The first budget of a new administration is particularly important as it shapes the parameters of the government’s ‘financial envelope’ for its five-year term. The budget, however, is about more than money; it is a major moment of political messaging.

In its first budget, the government will begin to convert the broad promises made before the election into specific policies. Converting election slogans into specific plans always carries the risk of losing many friends, and of accumulating critics.

Given that the new Conservative Party leader will be announced two days after the budget, critiquing the budget will be the incoming Conservative leader’s first test. Commentators also watch budgets closely for divergences in tone and priorities between the chancellor and the prime minister, since tensions here can become significant problems over time.

On the same day as the budget, the Office for Budget Responsibility (OBR) will publish a detailed five-year forecast for the economy and public finances called the “Economic and fiscal outlook”.

The context for the 2024 budget

Reeves is operating within an extraordinary number of restraints, some self-imposed and others exogenous. Labour’s manifesto pledged not to raise income tax, national insurance or VAT and to cap the headline rate of corporation tax at its current rate of 25%. These taxes account for nearly three-quarters of the UK’s £1trn tax revenue, leaving Reeves with far fewer options for the budget. Reeves, in her 8 July speech, also promised to stick to “robust fiscal rules”.

The immediate riddle that the budget needs to solve is: how can the government raise the money it needs, to begin work on its spending promises, and thus generate positive political momentum, without raising the four taxes mentioned above, and whilst sticking to the fiscal rules?

The longer-term puzzle for Rachel Reeves is: how she can ensure that wider government policies deliver increased economic growth (by raising productivity, promoting investment and boosting exports), so that in future budgets she has much greater freedom of manoeuvre, which only healthy tax revenues and stable public sector expenditure can provide.

The chancellor has hinted that she is looking to announce £40bn of new spending in the budget, funded by a blend of tax rises and spending cuts. On taxes, given that taxes on UK citizens are at a 70-year high, and more than nine million people of working age are economically inactive, the chancellor needs to act very carefully so that disincentives to work don’t increase further.

On the spending front, savings can be found through a mix of cuts and “productivity improvements” (often promised but frequently found to be illusory). The chancellor has already set out plans to scrap winter fuel payments for pensioners who are not on benefits and has cancelled numerous infrastructure projects.

Knowing that productivity gains often take years to materialise, Reeves has acted fast. She has issued a stern warning to the Cabinet that government departments and public services need to become more cost efficient. Each “unprotected department” (every department except Health, Education and Defence) has been tasked to find substantial savings, with some departments facing cuts of as much as 20 per cent.

What to look out for

1. Will national insurance (NI) be increased? Employers pay NI at a rate of 13.8% on all employees’ earnings above £175 per week, but pension contributions made by employers are currently exempt from NI. Rachel Reeves has refused to rule out imposing national insurance on employer contributions to employee pensions—a potential £10bn-20bn hit to employers. Whereas the party’s manifesto promised: “Labour will not increase taxes on working people, which is why we will not increase national insurance, the basic, higher, or additional rates of income tax, or VAT”, both Reeves and business secretary Jonathan Reynolds have used the line that the government will not raise taxes on “working people”.

Given that even a neutral observer—Paul Johnson, the director of the Institute for Fiscal Studies—has stated that increasing NI on employers would be a breach of Labour’s manifesto, Reeves is expecting the phrase “working people” to do a lot of heavy lifting, by claiming that the promise never covered either employers’ NI or wealthier people. Over the past few days, Labour ministers have been pressed hard on what exactly a “working person” is, and on whether their definition excludes people on higher salaries.

2. Which other taxes might be increased? Given the government’s pledges on the four main taxes, we are likely to see increases in a host of secondary taxes, many of which Labour governments have traditionally regarded as falling on the wealthy:

• The rate of capital gains tax is at a historic low, so a substantial increase here looks likely.

• Fuel duty has not been raised in more than a decade. Removing the 5p discount that Rishi Sunak introduced in 2022 would raise £2bn a year.

• The government may also look at reducing the annual ISA allowance of £20,000.

• Inheritance tax is another likely target, including the removal of reliefs for AIM shares and agricultural land.

• Expect also to hear the two flagship tax rises trailed in the manifesto; VAT on independent schools and ending “non-dom” status.

• The greatest tax rise of all, “fiscal drag”, will not get a mention during Wednesday’s budget. Freezing income tax thresholds is one of the greatest stealth taxes ever invented, and generates about £7bn a year. Thresholds for income tax and NI are currently frozen until 2028. Reeves is said to be considering extending the freeze beyond that, which will expose many more people to the 40% higher rate, which kicks in at all earnings above £50,270.

3. Will the fiscal rules be changed to allow more borrowing? The new government has committed to two main fiscal rules: Our fiscal rules are non-negotiable and will apply to every decision taken by a Labour government. This means that the current budget must move into balance, so that day-to-day costs are met by revenues and debt must be falling as a share of the economy by the fifth year of the forecast. (Labour Party Manifesto, 2024)

How can the government borrow more whilst still sticking to its fiscal rules and without triggering a Liz Truss-style market panic? The government may increase the forecast horizon beyond five years when thinking about the profile of debt, in order to allow for more of the benefits to materialise, or could exclude from the figures any debt taken on by publicly owned or underwritten banks such as the new ‘National Wealth Fund’.

One of Reeves’ more mystical statements said: “it is time that the Treasury moved on from just counting the costs of investments, to recognising the benefits too.” It looks like the government might adopt a looser debt target than the one used by the previous government. Reeves’ comment suggests she is considering opting for a radical change by adopting the PSNW (public sector net worth) measure which allows the value of new public assets (for example, new roads or railway tunnels) to be reflected as a non-financial asset.

The problem with this is that public sector assets—such as the UK road network, prisons, hospitals and school buildings—are different from business assets. They don’t generate income, they are extremely difficult to sell and are therefore extremely difficult to value. In short, they are not “assets” or “investments” in any meaningful sense. In reality, they are the opposite of assets, because they create a continual stream of running costs.

Given the gulf between the government’s ambitions and its pocketbook, it is quite possible that it will put much of its early focus on policies which don’t require government expenditure: policies such as planning reform, constitutional reform and enhanced employee rights.

Peter Swabey, policy & research director at The Chartered Governance Institute UK & Ireland commented:

“Business leaders will be watching the Budget closely. The legitimate fear of many of the business leaders that I have spoken to is that UK business will carry much of the cost for the Government’s agenda. When the cost of doing business in the UK is at an all-time high, this is not the right time to raise those costs further. Loading more obligations onto businesses may not cost the Government money, but it does cost the economy. We advise caution and consultation.”

After a difficult first 100 days, marked by the row over the means-testing of winter fuel payments, “freebie-gate” and the shakeup of senior personnel in Downing Street, the budget is an essential opportunity for a major reset and to shake off the sense of political drift. On Wednesday, it will start to become clear who the winners and losers will be over the next five years.

Daniel Valentine is head of communications at The Chartered Governance Institute UK & Ireland.

This article was originally published on The Chartered Governance Institute UK & Ireland’s website on 23 October 2024 and is reproduced with permission.