Explainer
Five key
charts: what will underpin 2024 budget statement by Rachel Reeves?
Labour
chancellor to deliver budget after speculation over tax rises, debt rule
changes and promised end to austerity
Autumn
budget live: latest news updates
Richard
Partington Economics correspondent
Wed 30 Oct
2024 07.00 GMT
Rachel
Reeves will deliver the first Labour budget in 14 years on Wednesday after
weeks of speculation over tax increases, changes to the government’s debt rules
and a promise to bring an end to austerity.
The
chancellor has said she will focus on three priorities: protecting working
people, fixing the NHS and rebuilding Britain. However, the government has
warned the public to expect “painful” decisions because of what Labour has
termed a dire economic inheritance left by the Conservatives.
Here are
five key charts that will underpin the chancellor’s budget:
Stronger
economic growth this year
Britain’s
economy was the fastest-growing in the G7 in the first half of this year,
helped by cooling inflation, as it bounced back from a shallow recession in the
second half of 2023 triggered by the cost of living crisis.
Labour’s
central mission is to reboot the economy, with an ambition to hit the highest
sustained growth rate in the G7 over consecutive years by the end of the
parliament.
While growth
beat expectations earlier this year, it has slowed in recent months as
households remain under pressure from elevated interest rates. However,
economists say it is clear that the Office for Budget Responsibility (OBR) will
upgrade its growth forecasts for this year. In March the OBR forecast that
growth would be 0.8% this year, before rising to 1.9% in 2025 and 2% in 2026.
The consultancy Capital Economics expects an upgrade to 1% this year. However,
City analysts expect growth could be revised a touch lower in future years.
Inflation
has cooled by more than anticipated in recent months, dropping below the Bank
of England’s 2% target in September. Financial markets expect Threadneedle
Street to cut interest rates from 5% at present to as low as 3.75% by the end
of next year.
New rules
for national debt
Reeves will
rewrite the Treasury’s self-imposed fiscal rules to allow for higher borrowing
for investment in infrastructure, which could form the most radical plank of
her budget.
It is
expected she will use an alternative debt metric to meet a target for debt to
be falling as a share of the economy in the fifth year of OBR forecasts. The
chancellor is thought to have settled on a measure known as public sector net
financial liabilities (PSNFL), which takes into account financial assets,
including student loans and company shares, alongside government debts.
In the March
budget, Jeremy Hunt, her predecessor, left headroom of just £8.9bn against his
debt target. Using PSNFL would have meant an extra £53bn, according to the
Institute for Fiscal Studies.
Reeves is
expected to stop short of choosing a wider definition, public sector net worth,
which also takes account of physical assets, including schools, hospitals,
roads and railways and could add an extra £58bn of headroom.
The
chancellor has been at pains to avoid spooking financial markets, insisting
there will be “guardrails” to ensure public money is spent wisely. She is also
unlikely to use all of the additional headroom unlocked by the change.
Infrastructure
investment boost
The
chancellor has said her budget will place investment at its heart as the key
ingredient for powering future economic growth.
Public and
private investment in the UK economy has lagged behind comparable rich
countries for decades, particularly since 2010. Experts say this is among the
reasons for Britain’s crumbling infrastructure and the sluggish economic
performance of the past 15 years.
Labour
inherited Tory budget plans for public infrastructure investment to fall as a
share of the economy, from 2.4% of GDP in the current financial year to 1.7% by
2028-29. To avoid this, the IFS estimates a top-up of £24bn would be required.
Reeves could
use some of the headroom within her new fiscal rules to halt the decline. The
government will spell out some details for the next financial year at the
budget, with possible decisions on projects such as HS2, before a full 10-year
infrastructure strategy next spring.
Tax
increases
Keir Starmer
warned in his pre-budget speech on Monday that Labour would “embrace the harsh
light of fiscal reality”, teeing up billions of pounds’ worth of tax increases
in the budget.
Reeves has
spoken of the need to address a £22bn “hole” in the public finances that Labour
says was covered up by the Tories. The chancellor has warned cabinet colleagues
the shortfall will persist to the end of the parliament, requiring tax rises
and spending cuts worth as much as £40bn.
Labour
promised before the election not to increase taxes on “working people”,
including through income tax, national insurance contributions (NICs) and VAT,
alongside a pledge not to raise the rate of corporation tax. This has left the
chancellor targeting alternative measures, including levies on wealth, such as
capital gains tax, pensions relief and inheritance tax.
Reeves has
hinted that taxes on business will rise, including a mooted increase in
employer NICs. However, she risks being accused of playing fast and loose with
Labour’s definition of “working people”. Economists warn the costs could be
ultimately passed on to workers in the form of lower wages.
The
chancellor could also extend a freeze on personal tax thresholds first
introduced by the Tories. Known as “fiscal drag”, it deprives workers of an
annual inflation-linked rise in their tax-free personal allowance and drags
more people into higher income-tax brackets.
Ending
austerity?
As the flip
side of higher taxes, spending will also rise. Labour has promised “no return
to austerity” despite having to take “difficult decisions” on some areas of
expenditure, welfare and tax.
The
government is expected to outline a 4% real-terms increase in NHS funding,
significantly higher than that earmarked by the last government.
In March the
Tories outlined a 1% real-terms increase in day-to-day spending for the next
five years. However, after accounting for ringfenced departments – including
the NHS, defence, schools and foreign aid – unprotected areas, including
councils, courts, further education, and prisons, faced a sharp real-terms cut.
The IFS
expects that Reeves can just about avoid real-terms cuts to unprotected
departments. But after years of deep cuts to funding in some areas, and with
services under intense pressure, she could choose to go further by increasing
funding in line with national income. This would require £25bn of tax increases
to “end austerity”.
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