What will the budget mean for economic growth? Experts give their view
- Written by Maha Rafi Atal, Adam Smith Senior Lecturer in Political Economy, School of Social and Political Sciences, University of Glasgow
Since the election last year, the UK government has said economic growth is its top priority, as a way to improve living standards, cut NHS waiting lists and ease pressure on household finances. But with the Office for Budget Responsibility predicting growth this year to be a below-average 1.5%, it seems things haven’t gone entirely to plan.
So would Rachel Reeves’ second budget provide any glimmers of hope? Here’s how our panel of experts reacted.
Tax-raising budget that may encourage growth – but doesn’t guarantee it
Maha Rafi Atal, Adam Smith Senior Lecturer in Political Economy, University of Glasgow
This is a substantially tax-raising budget, but one that tries to obscure where the burden will fall. Rather than confronting the need to raise the basic rate of income tax[1], the government has opted for a prolonged freeze in thresholds. This is, in effect, a sizeable stealth tax: as wages rise with inflation, more middle-earners are pulled into higher-rate bands.
However, this approach is still more weighted towards raising revenue from higher earners than a broad-based rise that would spread the load across the income distribution. A sharp break between the basic and higher rates – an unusual feature of the UK income tax setup – remains. Changes to national insurance follow a similar stealth logic. The rate remains unchanged, yet its scope has widened, particularly through restrictions on pension salary-sacrifice[2].
Whether these kinds of changes break Labour’s manifesto commitments not to raise taxes on “working people” is increasingly a matter of semantics. Many working people’s take-home pay will be less than it would have been, even if the headline tax rates have not changed.
One positive consequence of raising the revenue this way, however, is that individuals and households – not just employers – will carry much of the cost. Some measures that would have directly targeted businesses, like a bank windfall tax, have been abandoned.
This makes the budget more supportive of growth than early reports anticipated, because taxes that fall primarily on employers take funding away from things like opening new facilities or creating jobs.
Yet the growth forecasts remain weak because there is still no plan to raise productivity. Government investment in skills and infrastructure is lacking, and tighter immigration controls (which the government is also imposing) limit labour supply and impose other transaction costs on businesses. Growth requires broader changes to these other aspects of economic policy and cannot be generated through tax reform alone.
£3 trillion government debt weighs heavily on Reeves’ budget choices
Steve Schifferes, Honorary Research Fellow, City St George’s, University of London
The chancellor has announced measures to raise £26 billion[4] in her budget statement. Driving her decision is the need to cap the size of the government’s debt, which, at £2.9 trillion[5] amounts to 95% of the total size of the UK economy.
But also feeding into her choices is the need to abide by her self-imposed fiscal rules[6]. These require her to cut the deficit (the difference between tax revenue and spending) every year for the next five years. An additional challenge is that the cost of paying interest on this huge national debt has gone up sharply in recent years, with the government now paying more in interest that it spends on education.
The fiscal rules are designed to reassure financial markets, which lend the government the money it needs, that the chancellor is prudent with the country’s finances. Tax rises were necessary to meet Reeves’ “ironclad” rules (based on the forecasts of spending watchdog the Office for Budget Responsibility) with the aim of stabilising that huge debt.
The problem is that small changes in any of the forecasts can throw the government off course. As the former head of the Office for Budget Responsibility, Robert Chote[7], noted: “The chances of any economic or fiscal forecast being accurate in every dimension are infinitesimally small.” However, Reeves has now left herself more “fiscal headroom” (the amount she can increase spending further without breaking her rules) – £21.7 billion[8].
She has gone some way to acknowledging the problem of predictions by making two changes in the fiscal rules. Last year she exempted investment spending – on building roads, power stations and houses – from the rules, in the hope of encouraging economic growth.
And this year, she has announced that the Treasury will produce a budget forecast only once a year. This will avoid the difficult spring statement[9] she had to present this year.
But neither of these changes are guaranteed to give her the stability she needs to encourage economic growth and security. Relying on a single OBR forecast makes each budget a hostage to fortune. It might be wise to give a range of economic and revenue forecasts, as the Bank of England already does. The very concept of a fixed amount of “headroom” is probably too rigid and leads to continual changes in policies and taxes.
Since 1997 when fiscal rules were introduced, the Treasury has announced ten sets of rules with 28 different specific targets. For example, when once it was prudent to keep the debt below 40% of GDP, now 100% is an acceptable target. So it is clear that the markets themselves do not view the fiscal rules as immutable, and would probably like more stability and predictability in government spending and tax policy.
Read more: What the budget could mean for you – experts react to the chancellor's announcement[10]
Where is the investment in infrastructure and industry?
Phil Tomlinson, Professor of Industrial Strategy and Regional Development, University of Bath
Budget day can often feel like Groundhog day. The same old problems – chronic under-investment, crumbling infrastructure and weak productivity – continue to bedevil the UK economy, with low growth significantly reducing the chancellor’s room for fiscal manoeuvre. Hers is not the first government to find itself unable to break this doom loop.
So in her second budget, Rachel Reeves focused mainly on tax-raising measures. There was some mention of a commitment to raising investment in critical infrastructure for sectors like transport, energy and digital development, but the details were set out earlier this year[11].
Pre-budget announcements also included a commitment to employ an extra 350 planners[12] to support the government’s ambitious plan to build 1.5 million homes[13] over this parliament. As well as providing a boost to the construction industry, building more affordable homes should improve the mobility of the labour market.
And making it easier for workers to relocate to regions with better job opportunities (which align with their skills) will give a much needed boost to productivity. It may also attract new private investment in local industries and “left behind” regions of the UK.
The critical part of any infrastructure project is actually getting it done. But often major projects, after being announced to great fanfare, can become bogged down in delays caused by a lack of skilled labour and changing economic circumstances.
To be a success it is vital to ensure that project targets are set early, and resources are ring-fenced. There also needs to be sufficient funding set aside to support skills and training that align with long-term infrastructure priorities. The budget included little about this.
If the government wants drivers to switch to electric, it must be wary of the powers of dissuasion
David Bailey, Professor of Business Economics, University of Birmingham
From April 2027, fuel duty rates – frozen back in 2010 and then cut in 2022 – will rise again in line with inflation. This was inevitable. The freeze has cost the government something like £10 billion a year in lost revenue.
And as more drivers switch to electric vehicles, fuel duty (which even with the freeze raises some £35 billion a year for the government) will start to dry up. The government needs to find cash, and fuel duty is a lever it feels it can pull.
More positive news for drivers is the 2026 arrival of the “fuel finder” scheme[15] which will force petrol forecourts to share real-time prices so that customers can shop around more easily.
As expected, a pay-per-mile tax for electric and hybrid vehicles will be introduced, from April 2028. And while a long-term shift to pay-per-mile could make a lot of sense[16], the devil is very much in the detail. Electric vehicle (EV) owners in rural areas, who typically drive longer distances, could be badly hit, and the move needs to be carefully thought through.
The Office for Budget Responsibility thinks this could bring in £1.1 billion by 2029. But it could also put some people off making the switch to EVs, which is probably why the government has expanded EV grants to encourage take up.
A big, missed opportunity to shift the dial on EVs came in the government failing to cut VAT on public charging from 20% to 5%, to match the VAT rate on domestic electricity. This means drivers who can’t charge at home will continue to pay more, something which really needs to be tackled if the government wants people without private parking to make the switch.
Read more: Electric vehicle owners face new pay-per-mile tax – what could be the environmental costs?[18]
References
- ^ basic rate of income tax (theconversation.com)
- ^ pension salary-sacrifice (www.bbc.co.uk)
- ^ Phillip Roberts/Shutterstock (www.shutterstock.com)
- ^ £26 billion (www.independent.co.uk)
- ^ £2.9 trillion (www.telegraph.co.uk)
- ^ fiscal rules (www.instituteforgovernment.org.uk)
- ^ Robert Chote (obr.uk)
- ^ £21.7 billion (www.gov.uk)
- ^ spring statement (theconversation.com)
- ^ What the budget could mean for you – experts react to the chancellor's announcement (theconversation.com)
- ^ set out earlier this year (theconversation.com)
- ^ extra 350 planners (moneyweek.com)
- ^ 1.5 million homes (theconversation.com)
- ^ richardjohnson/Shutterstock (www.shutterstock.com)
- ^ “fuel finder” scheme (competitionandmarkets.blog.gov.uk)
- ^ make a lot of sense (theconversation.com)
- ^ Clare Louise Jackson/Shutterstock (www.shutterstock.com)
- ^ Electric vehicle owners face new pay-per-mile tax – what could be the environmental costs? (theconversation.com)
