The UK Budget: A budget for working people? Perhaps, but too risky...

Posted on: 31 October 2024 in Research

Professor Costas Milas and Dr Michel Ellington share their expert views on the latest UK Budget statement and the potential knock-on effect of tax increases on workers.

The framing of Rachel Reeves' Autumn 2024 budget was one for the working people, with increases in spending on the NHS over the next couple of years and fuel duty remaining frozen.

But is this really a budget for working people? Perhaps. We believe the announcement has good intentions; however, it carries a big economic and political risk. 

Surges in short-term spending are fuelled by increases borrowing, hikes in employer contributions to National insurance and increases in capital gains tax.

Reeves announced employer National Insurance (NI) contributions would rise from 13.8% to 15%, and the threshold at which businesses start paying NI on workers' earnings would be lowered from £9,100 to £5,000.

These funds will largely be used to help support the NHS, and in turn increase health services to UK residents.

In principle, this is great news, but there is no guarantee such increases in spending will be: fully spent over a 24-month period; allocated efficiently; or increase NHS productivity.

According to the latest Office for Budget Responsibility (OBR) forecast, government spending will increase by almost £70 billion over the next five years as a result of policies in the budget statement.

Delving deeper into planned expenditure, increases in day-to-day pending all come in the next two years, but from year 3 until the end of the 5-year period spending is flat. This paves the way for future tax rises to accommodate any further claims on spending.

While, as Labour state, employees will see no increase in contributions in their payslips, working people will likely fund the increases in taxation announced yesterday.

The economic risk of minimum wages being higher than inflation and rises in employer contributions is that firms could hire less and potentially increase redundancies.

Such economic risks feed into the OBR forecast, where growth increases over the next two years, but remains stagnant until the end of the 5-year period. This is met with projections of higher inflation and interest rates. 

Ultimately, the Labour government will need growth figures higher than OBR forecasts to avoid these measures backfiring economically and politically.

	Professor Costas Milas Professor of Finance
	Dr Michael Ellington Senior Lecturer in Finance