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The Budget will be on Wednesday 28th October. The Chancellor will deliver it in Parliament at 12.30 pm after Prime Minister’s Questions.
According to many commentators the Budget is likely to be a low-key event. The government would like to spend more in a variety of areas, but the pre-Budget forecasts have warned against further increases in spending and borrowing. The rise in inflation to 3.5% with the Bank forecasting a rise to 4% to come, and the increase in the costs of government borrowing, leave finances stretched and will be reflected in forecasts. Housebuilding is also falling well short of the forecast rises, though there might be some relief on productivity. This will limit the scope for spending increases.
One of the large, planned increases has been for Defence. The government has announced that it will delay outlining the specific financial roadmap, pushing back how it can achieve the ultimate target of 3.5% of GDP by 2035 later in 2027 in a Public Spending review. Similarly, full implementation of the signposted National Care Service programme of work has been deferred to after the next election.
It seems likely the government’s focus will be on finding money to ease the cost-of-living pressures which it has promised to abate. There is press speculation the banks may be in for a higher windfall tax or surcharge on their higher Corporation Tax rate. This could subsidise the costs of dearer energy and goods, or to offer more income support to benefit recipients and the lower paid. Mr Burnham is also known to think tax thresholds are too low but changes to them are costly for the Treasury. There is speculation that pensioners dependent on the state retirement pension may get a higher tax-free allowance.
There has been less speculation this time than before the two Reeves budgets about tax increases. Both those budgets did result in large tax rises. The Chancellor has let it be known he was not planning a rise in Capital Gains Tax. He has also been saying pre budget that he wants to encourage entrepreneurs and smaller businesses, which implies he is not looking at further wealth taxes that would hit smaller companies and enterprise. However, the wealthier, property owners and savers remain at some risk of further modest and unhelpful changes.
He has re announced the Starmer government plan to cut red tape on business by 25% such as reduced requirements for annual reporting of smaller and medium sized companies. This is mildly helpful but not a new departure nor likely to be a big contributor to business cost reduction.
It seems likely the government wants to use the budget to lift spirits a bit more, or at least to avoid a further hit to confidence. This could mean a pleasant surprise to tackle the cost of living and energy prices. They could ease pressures on some small businesses and some earners. This is likely to be within a context of only modest shifts of money within the £3 trillion economy as the government seeks to avoid the hit to confidence and to new jobs that the two previous budgets brought about through large tax and cost rises.
The government has announced a series of measures to promote AI.
They include £120 m to expand testing and safety standards at the AI Security Institute and £100 m funding for National AI Biosecurity Lab to improve safety and research. £60 m will be spent on improved cyber security for public infrastructure and for a Centre to detect security threats. There is also £60 m for manufacturing applications, £60 m for procurement contracts, £23 m for economic research and £18m for a chip academy. This is likely to be from within existing AI budgets leaving the baseline figures for total government expenditure unchanged.
The government has indicated it wishes to increase public investment, using the greater flexibility that the National Wealth Fund and The British Business Bank allows. This is the area where we are likely to see the largest increases in spend. Rachel Reeves relaxed the Fiscal rules to allow more capital spending on borrowed money. She said that in future, the debt raised to invest could be partially offset by granting a credit for the asset created, taking that off the total debt number. There have been stories in the press to the effect that the budgets of such public sector financial institutions will be increased to allow more capital spend based on additional borrowing.
The National Wealth Fund has already agreed to lend £ 36.6 bn over the current construction period to the Sizewell nuclear power station project. The Treasury will raise this money in the bond market and transfer it as needed to the Fund. The Fund will lend it on to the Sizewell consortium where it holds a 44.9% share, at a higher rate of interest than the government is paying.
The largest single investment underway by the state is the new railway line London to Birmingham, HS2. Now likely to cost around £100 bn it will require around £7bn next year for construction costs. It is difficult to see how this large sum will deliver an asset worth anything like the level of borrowing to build. Delays point to 2039-43 completion. In the early years it will be difficult to break even.
The National Wealth Fund and British Business Bank were planned to spend around £7bn a year per annum together. The Chancellor has announced he will increase their funds available for spending over the next five years by £20.4 bn. They will net off the value of assets created against the extra borrowed funds when computing state net debt.
The Chancellor will be able to use some of this money to invest in drone and other weapons development and manufacture by private sector companies. This can count towards the NATO spending target.
The Budget may be inventive around the looser Fiscal Rules they have inherited. The Prime Minister and Chancellor will look to find ways to boost public capital spending and borrowing without raising state debt as a percentage of GDP. Markets would worry if the Fiscal Rules were broken by exceeding debt targets. Gordon Brown used private finance extensively to boost public investment, and he is now a self-appointed adviser to the current Chancellor. The new Fiscal Rules could be the Chancellor’s flexible friend.
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.