Breaking down the UK Autumn Budget 2024 and its economic implications

31 October 2024

4 minute read

After weeks of speculation, instigated by generally accurate rumours in the media, the UK’s Chancellor of the Exchequer delivered a budget on 30^th October (2024) that will set the tone of the new government’s economic agenda.

Despite giving very little away in the election campaign and their early days in office, the labour government will vastly increase its public spending capacity through extra borrowing and taxation in the hope that extra funding for the NHS, schools, and infrastructure will fuel its dash for economic growth.

We provide an outline of the key aspects of the budget along with the economic implications.

Reforms to the fiscal framework

A recurring theme of the chancellor’s address in the Commons was a commitment to economic growth and stability. To this end, she introduced the following new fiscal rules to enhance transparency and accountability:

Stability rule: Balance the current budget so that day to day spending is met by revenues, with governmental borrowing used solely for investment.
Investment rule: Reduce net financial debt as a proportion of GDP. This aims to keep debt at a sustainable level whilst changes to how debt is measured (now incorporating future returns on government assets) will allow for a wider scope of borrowing and government spending.

The Office for Budget Responsibility (OBR) projects these rules could be met earlier than required, with a surplus anticipated by 2027/28. They forecast the current budget will be in deficit by £26.2 billion in 2025/26 and £5.2 billion in 2026/27, before moving into surplus of £10.9 billion in 2027/28, £9.3 billion in 2028/29 and £9.9 billion in 2029/30. Borrowing is expected to fall from 4.5% of GDP this year to 2.1% of GDP by the end of the forecast.

Economic forecast by the Office for Budget Responsibility (OBR)

The OBR expects consumer price index (CPI) inflation to average 2.5% this year, decreasing gradually to 2.0% by 2029. This aligns with the government’s goal to maintain the Monetary Policy Committee’s (MPC) target of 2% inflation. A return to lower inflation levels should help stabilise the UK economy.

The OBR forecasts real GDP growth at 1.1% in 2024, peaking at 2.0% in 2025, followed by 1.8% in 2026, then stabilising at 1.5% in both 2027 and 2028, and rising slightly to 1.6% in 2029. It claims this budget will permanently increase the economy’s supply capacity, thereby boosting long term economic growth.

Tax

The budget will raise taxes by £40 billion. Employer national insurance contributions (NICs) will increase by 1.2% to 15% in April 2025, aiming to address the £22 billion ‘black hole’ in public finances. Governmental allowances mean that 865,000 employers will not pay any national insurance next year, but defined benefit schemes may be impacted.

The lower rate of capital gains tax will rise from 10% to 18% and the higher rate will increase from 20% to 24%, ensuring asset owners pay their fair share whilst maintaining competitive tax rates with comparable EU countries.

The national minimum wage will rise by 6.7% to £12.21 per hour, moving to a flat rate for those aged 18 and above. This may boost economic spending. Income tax thresholds will remain frozen until 2027/28, after which they will rise with inflation. This will hopefully allay fears of fiscal drag, which some predict could lead to deflationary effects on the economy.

Public sector spending

An additional £22.6 billion will be invested in the NHS to support 40,000 extra weekly elective appointments and reduce waiting times. Another £2.5 billion will fund more procedures, diagnostic tests, new beds, and deal with critical NHS maintenance. This could impact reliance and demand for private health insurance. The government is also investing £6.5 billion on schools, prisons, and road infrastructure.

Investment in businesses, infrastructure, and clean energy

The budget plans to increase public investment by more than £100 billion over the next five years to boost growth and private investment. This includes investing in transport and the construction of 1.5 million homes, aided by changes to planning regulations. Alongside schemes to help first time buyers, this could increase demand for home insurance.

The creation of a national wealth fund will enable the government to inject £70 billion of private investment into growth driving sectors, while the protection of record R&D funding aims to support new industries and job creation.

To transform the UK into a ‘clean energy superpower’, the Energy Profits Levy (EPL) on oil and gas companies will increase from 35% to 38%. In conjunction with this the government is strengthening tax incentives on electric vehicles to further drive this transition. These measures support the energy transition and have implications for the insurance industry as the economy shifts toward greener initiatives.

Gilt yields and FTSE movements

In response to the increase in borrowing announced in the budget, UK Gilt yields have risen steadily. However, this rise has been modest in comparison to the surge after Truss’s mini-budget two years ago. This is likely due to the debt rules implemented by the Chancellor and the credibility built with the gilt market through the OBR’s favourable forecasts.

The FTSE 100 fell by 0.7% today, with retail stocks declining sharply as tax increases announced in the budget dampened investor enthusiasm. Housebuilding stocks also dropped despite the government’s £5 billion pledge to build new homes.

The government’s budget places strong focus on investment and business as drivers of economic growth, alongside an emphasis on fiscal responsibility. They claim this budget will promote stability and growth for all, combined with a strengthening of public services.

Still have questions?

Get in touch if you want to learn more about how these changes might impact your organisation – info@4-most.co.uk.

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