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UK in Focus: Special Edition - UK Budget
The UK government has announced GBP100bn of new investment over five years alongside higher ‘day-to-day’ public spending and a GBP40bn annual tax rise. A tough start for corporates, but it’s not all bad news.
Big policy announcements
In her inaugural Budget UK Chancellor Rachel Reeves has set out big plans that mark a sea change in UK fiscal policy. Announcements included additional ‘day-today’ spending worth GBP47bn in 2029/30 – although some departments will still face real-term budget cuts – tax increases worth GBP41.5bn per year, and an uplift to public sector investment by an average of GBP24bn per year.
Unfortunately for the Chancellor, the tough decisions may not end with her first budget. Although the new fiscal targets are met – to balance the current budget and have public sector net financial liabilities falling as a share of GDP by 2029/30 – there is only a slim margin for error. Until the targets become rolling targets in two years’ time, and the growth benefits of the additional investment begin to be evident, further painful decisions may be necessary if the near-term growth outlook disappoints.
The OBR raised its growth forecast for 2025/26 and 2026/27; however, that uplift reflects higher government activity offsetting expected weaker consumption and private sector investment. There was also an upward revision to inflation despite the OBR unusually forecasting that the BoE would respond to higher growth with a more gradual fall in interest rates. We still expect an interest rate cut on 7 November, at which point the BoE will give its assessment of fiscal policy announcements.
A tough start to the parliament for businesses
For businesses, policies were plentiful but they will endure most of the higher taxes via a 1.2ppt rise in the rate of employer National Insurance and a lower threshold at which it is payable. While a higher employment allowance will shield some small firms, a cut to business rate tax relief will cause a tax rise for those in the retail and hospitality sectors. In addition, the National Living Wage will rise 6.7% for over 21s and by 16% for 18-20yr olds. Overall, these changes will be of concern for many businesses and add to the sharp cumulative rise in costs, particularly labour costs, in recent years.
However, it wasn’t all bad news for business. The Chancellor announced a variety of measures to support growth from an uplift to investment in R&D and a maintenance of R&D tax reliefs, a GBP40m reform of the Apprenticeship Levy to boost skills and some corporate tax policy certainty with the Corporate Tax Roadmap. So, while corporates face a challenging near-term outlook, greater political certainty and public sector investment could open opportunities.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Emma Wilks
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