Autumn Budget 2024: Key takeaways

Going into the Budget, the Treasury were at pains to emphasise that some tough decisions would need to be made, and that would mean tax increases, given that spending plans were already unrealistically low. The Treasury certainly did deliver tax increases, to the tune of £25bn next fiscal year, rising to more than £40bn in 2028 and beyond.

At 1.25% of GDP, this qualifies as the second biggest tax-rising budget on record after the 1.4% increase seen in 1991. However, the tax news was perhaps less negative than expected.

Firstly, the bulk of tax rises was met by the increase in National Insurance Contributions (NICs) paid by employers, reducing the need for hikes elsewhere. Of next year’s £24.7bn rise, the NICs change meets £23.8bn. While this is expected to drag on employment and growth somewhat, it does obviate the need for a hike to employee NICs or income taxes.

The Chancellor also opted to end the freeze on tax thresholds. The tax threshold freeze introduced by the Conservatives will be maintained as currently implemented but will not be extended to future years.

As well as increases to taxation, the Budget entails spending increases. In fact, spending will increase by more than tax revenue, rising by £25bn this year and £69.5 billion a year over the remainder of the forecast period. In comparison, tax rises by £1.3bn this year and an average of £36.2 billion a year from next year onwards. This likely explains why the Office for Budget Responsibility (OBR) forecasts growth to be stronger in the first years of the forecast, when higher spending boosts growth, before the effects of higher borrowing become a drag later on.

It is every chancellor’s prerogative to fiddle with the fiscal rules – this is now the tenth iteration of the rules since 1997. Chancellor Reeves made two main changes to the fiscal rules.

On current spending, the new fiscal mandate is to have the current budget in surplus in 2029-30, until 2029-30 becomes the third year of the forecast period. From that point, the current budget must then remain in balance or in surplus from the third year of the rolling forecast period. The OBR estimates the budget meets this rule by a slim margin of 0.3 per cent of GDP (£9.9bn) in 2029-30.

On government debt, the Chancellor is replacing the old target of Public Sector Net Debt ex BoE with Public Sector Net Financial Liabilities (PSNFL). PSNFL must be falling as a percentage of GDP in 2029-30, until 2029-30 becomes the third year of the forecast period. Debt should then fall from the third year of the rolling forecast period. The change to the debt rule increases borrowing headroom of £21.5bn at this Budget, with the rule met by a margin of 0.5 per cent of GDP (£15.7bn) in 2029-30. The Chancellor plans to use a significant chunk of the extra borrowing allowance facilitated by the change in the debt rule.

Overall, this is a relatively pro-growth budget, in the near term at least, and rate cut expectations have been scaled back accordingly.

Admittedly, OBR forecasts for growth look very optimistic – GDP growth in 2025 is forecast to be 2%, which is double the Bank of England’s (BoE) own forecast, but this is often the case. This increases the likelihood of forecast downgrades, crimping spending headroom in future years. Nonetheless, even before the budget, UK growth was expected to be relatively resilient, with activity measures holding up well. Given this, it is hard to justify the argument for a more aggressive pace of rate cuts.

Today, market pricing for rate cuts has been scaled back in 2024 and beyond. Futures are now pricing in one rate cut this year (previously one to two) with rates now expected to be close to 4% in September 2025 (previously c. 3.5%).

As the Truss mini-budget debacle illustrated, a budget can be a risk event for markets. While UK assets did experience some volatility after the announcement, the scale was modest, and closing prices were more moderate.

The main impact on markets has been positive for UK-exposed equities, and negative for UK gilts, as investors anticipate less rate cutting action from the Bank of England.

While the Budget did not become a reason for UK assets to sell off, it will take time to establish if the spending plans outlined on Wednesday are enough to improve international sentiment to UK assets.

From a portfolio perspective, as multi-asset global investors, we continue to hold some exposure to UK names that we favour, within the context of a globally diversified portfolio. From that perspective, Wednesday’s Budget is just one factor to consider. We continue to closely monitor the run-up to the US election, as well as the evolution of policy decisions in China.

 

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