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The Autumn Budget, as expected, did not include any great tax shocks, with a generally anticipated increase in the tax on bank profits as the main additional revenue earner, with the intention to use proceeds to offset high energy prices and the cost-of-living pressures. The inevitable downside is the reduction in funds commercial banks have available to lend to businesses, related capital projects and consumers for homes and bigger ticket items. This is a tax which might slow growth in credit and activity and tempt some banks to divert more business to financial centres with lower rates.
The budget also included more taxes on savers, and landlords with property income, taking their income tax rates up to 24%, 44% and 49% for basic, higher, and additional rate payers. There is also a provision to stop companies paying money to shareholders as capital gains rather than as dividends. The relief for the disposal of business assets over a lifetime is halved to £500,000. More will be spent on enforcement and tax collection. Self-assessment tax will be collected earlier from payers. These are all measures which can create disincentives to savers, investors, and landlords.
The cut to VAT on electricity will be extended to July 2027 and the freezing of fuel duty will continue to June 2027. There is a one off £100 reduction in Council tax bills for Bands A to D. This is the single biggest give away from the budget to help with household bills this winter. By 2031-2 taxpayers will be paying 5.7% of GDP more in tax than in 2019-20.
The budget boosted public spending, again, taking the 2027-8 total up to £1504 bn from £1416 bn this year. That is an increase of £88bn or about 6%. Borrowing was up again to £146.1 bn. The government needs to also borrow an additional £166.5 to replace retiring debt. That takes the total bond issue next year to £312.6bn. The forecast deficit for 2027-8 was stated at £98.5bn last time but this has risen to £146bn.
Debt interest rises to £155 bn from £135 bn with Benefits up by £30 bn and Health by £15 bn. The OBR has increased its forecasts for both interest rates and inflation, meaning higher interest rate payments as more debt is taken out, and as old debt on lower interest rates is replaced, with debt at higher rates. Inflation is now expected to be 3.5% in 2027 compared to the 2% target.
The government acknowledges that benefit spending is too high and rightly wants to get more people into work and off benefits. It however it still lacks a strategy to do so and is following policies that have led to higher unemployment and fewer job vacancies. The past increase in National Insurance, the increases in Minimum Wage and public sector wages, and a range of tax measures from Business rates to the Packaging tax have helped push up the numbers on benefits by reducing job vacancies. The government has received the Milburn Report it commissioned into getting young people into employment, education and training but has not yet published it nor responded to it. They will need to adopt a range of measures to help create more jobs suitable for young people and to set out the right balance of incentives and conditions for benefits to get more into jobs.
The same is true of the unresolved issue of the Defence budget. The Chancellor resigned from the Starmer government over its refusal to spend 3% of GDP on defence by 2030, on the way to 3.5%, to meet the NATO commitment by 2035. The Chancellor has promised to meet this target but has put off finding the money until sometime next year as part of a wider review of Public Spending. This budget has not provided for additional tax revenue to meet this need, so the assumption must be the Chancellor expects to find spending reductions elsewhere to cover the extra money for our armed forces.
The government has taken some comfort from the kind words of the IMF, indicating that the current administration has a plan to get the deficit under control. However, this assumes much tougher spending controls in the next two years than the government has imposed over its first three years in office. Experience tells us that governments usually give in to spending pressures when a tough year approaches, helped by a target that moves on by one year every year. The Year 3 target never has to be hit. If an election is held in 2028-2029, it will be difficult to enforce these very tight spending limits.
The government is also exploiting the extra flexibility, or looseness, over the Fiscal Rules that Rachel Reeves introduced, allowing more to be spent on capital account. More money is being directed to the National Wealth Fund and the British Business Bank, who in turn can borrow more to finance spending and create assets which the government deducts from the debt figure. A clear focus is to provide more stimulus by backing, or part financing, energy, and transport projects. The OBR has warned the government that if it does not take greater control over the water industry, it will need to include its large debts and substantial capital spend as part of public spending and debt. Nationalisation of water has always looked too expensive to be likely.
The budget was advertised as a ‘steady as she goes’ budget, a budget to try to please backbench MPs whilst not threatening the bond markets. There were echoes of the Starmer/ Reeves budgets, with taxes up, spending up and borrowing up. The OBR gave it poor marks, moving growth next year down to just 1%, 0.5% below the March forecast. This remains a persistent worry: slow growth makes financing increased public spending much more difficult.
About the author
Lord Redwood is a well-known commentator on governments and economies, with long experience of investment markets. Trained as an analyst at Robert Flemings, he moved to N.M. Rothschilds where he became a Manager and Director of pension and charitable funds and Head of Equity Research. He was seconded to become Head of the Downing Street Policy unit before chairing a large, quoted UK industrial business. He served as an MP and a government minister.
In 2007 he set up Pan Asset with a colleague, an investment management business that pioneered active/passive funds and models in the UK. Following the sale of the business to Charles Stanley, a quoted investment manager in the City, he became their Global Chief Strategist advising on non-UK markets and economies. He also ran a demonstration fund for the FT, writing articles about it and illustrating the use that can be made of ETFs in portfolios.
John provides insights into the big investment issues of the day from the debt and spending problems of the major governments to the green and digital revolutions which have so much impact on equity markets. He is a Distinguished Fellow of All Souls College, Oxford, where he helps with their Endowment investments and gives occasional lectures on modern economics and politics.
Lord Redwood has supported the team at EPIC Markets with regular thought pieces, and with their migration to WH Ireland, will continue to add his personal views on topical matters.