A longer read on the Budget…

We’re sticking with our tradition of thinking through what the Budget means for our clients’ focus areas, sleeping on it and then giving you something a bit more considered to read. 

This time around, the Budget was touted to be all about tax rises. And while those are today’s headlines (from the “Return of tax and spend” through to the Halloween themed “Nightmare on Downing Street”), there was a lot going on beneath that top line. 

But before we get into those specifics, a quick recap on the new forecasts for the economy and public finances as a whole. The package of policy measures increases government spending by almost £70 billion a year over the parliament, through a combination of day-to-day spending increases and capital investment. The hefty tax increases, well trailed in the run up to the Budget, served to offset around half (£36 billion) of the spending rises. The rest is to be funded through higher borrowing, making the Budget one of the largest fiscal loosenings in recent decades, second only to the July 2020 Budget during the pandemic.

Higher spending and borrowing is partly enabled by the Chancellor re-writing the fiscal rules she uses as a guardrail for the public finances. There was much talk ahead of the Budget as to how financial markets might react to this. Early signs appear to suggest investors are a little twitchy about the quantums the Chancellor set out, with government borrowing costs moving higher in the immediate hours of trading following the announcement, although it’s fair to say other fiscal events in recent history have moved markets more! Part of the increase in borrowing costs might also be driven by expectations – including from the OBR – that the package of measures will add to inflation and potentially slow the pace at which the Bank of England can reduce interest rates in the coming years. That won’t be music to the ears of those needing a new mortgage any time soon. And as a result of the policy changes alone, the OBR estimate higher rates will cost the Government around £5 billion a year in extra government debt servicing costs.

So what about growth? The budget package is estimated to provide a boost to GDP growth in the near term, with the OBR forecasting growth of just over 1% this year, rising to 2% next year – a brighter picture than the stagnating economy we experienced last year, although still not rates to write home about. What remains to be seen is whether the huge investments the government announced yesterday can have an impact on the UK’s productivity – the key ingredient for getting the economy growing more strongly in future. 

Now, moving onto some of the specific policy announcements, the Chancellor announced changes to Carers Allowance designed to limit the penalisation of those unpaid carers trying to take on paid work. Our recent report for Carers UK, Poverty and financial hardship of unpaid carers in the UK, highlighted that the benefit eligibility rules, including the earnings limit, act as a significant barrier that prevents unpaid carers from paid employment. According to 2024 DWP research, only 16% of Carer’s Allowance claimants are currently in paid work. One of our recommendations was to “increase the Carer’s Allowance earnings limit to 21 hours at National Living Wage (…) and peg it to National Living Wage increases.” While what was announced today does not go as far as that (it only raises the limit to the equivalent of 16 hours at National Living Wage), it is definitely a step in the right direction.

More widely, the Government also promised to look into overpayments and carry out more work into the earnings limit to see what else can be done to support unpaid carers into work. Our report offers several recommendations here, including introducing an earnings taper for Carer’s Allowance (as, currently, earning £1 above the limit will cause the carer to lose the entire Carer’s Allowance). Let’s hope this is the start of further reform.

Turning to pensions, employer contributions play an important role in UK pension saving. More than half of eligible employees receive an employer contribution that is greater than the default 3% of band earnings (from DWP analysis). This makes an important overall contribution to levels of pension saving, given we know that the default rate will not provide an adequate retirement income for most people. Anything that reduces the incentives for employers to contribute to pensions risks a reduction in overall savings rates, and increases the risk of undersaving at the population level. As a result, we’re pleased to see the Government preserve NICs relief on employer pension contributions. However, the increase in the overall Employer’s NICs burden may create political pressure to hold off any increase in default pension contributions. As our work with Phoenix demonstrates, an increase in the default rate is desperately needed to improve retirement outcomes and boost investment in the UK economy.

Another area where our work has contributed to the debate is on bus travel. While it is welcome that the cap on bus fares was extended to December 2025, this came with an increase in the fare cap from £2 per single to £3. Our work for the Confederation of Passenger Transport on the role buses play in the route or net zero made the case that a longer-term cap is part of a mix of policy measures needed to support modal shift. More on that here.

Finally, deep within the mixed bag of announcements was some good news for employee-owned businesses, as the Employee Ownership Trusts (EOT) model was future-proofed and the threat to its tax advantages receded. Support for the model is welcome, particularly as work we did exploring the impact of the sector estimated that employee-owned businesses (EOBs) are around 8%-12% more productive than non-EOBs. You can read more here on the announcement and here on the impact report.