Subrahmaniam Krishnan-Harihara, Deputy Director of Research at Greater Manchester Chamber, gives an overview of today's Budget.
For the first time since 1221, when the office of the Chancellor of the Exchequer was set up, a female Chancellor took to the dispatch box to deliver the Budget, this was also the first Budget of the new Labour government. The Prime Minister and the Chancellor had done a lot of scene-setting for the Budget, and one expected the announcements to chime with Labour’s oft repeated mantra of “Pro Growth, Pro Worker”. The need to “fix the foundations” and plug the “£22 billion blackhole” formed other sub-plots. Combined with speculation - some will say leaks, which invited a reprimand from the Deputy Speaker - the expectation, therefore, was that there would be a slew of tax rises. By announcing new tax rises of £40 billion, the Chancellor ensured that she lived up to expectation.
Headlined by an increase in employer NIC to 15% (from the current 13.8%) and lowering the threshold at which businesses start paying NICs on an employees' earnings from £9,100 to £5,000, the bulk of the tax increases come primarily in the form of employment related taxes. To cushion smaller businesses, the Employment Allowance, available to employers whose Class 1 NI liabilities are less than £100,000, will increase from £5,000 to £10,500. These changes, due to start in April 2025, are expected to contribute £25 billion to the exchequer by 2028/29.
The Chancellor also confirmed expected changes to capital gains tax (CGT) and inheritance tax (IHT). The lower rate of CGT will increase from 10% to 18%, while the higher rate will go from 18% to 24%. At the same time, CGT on the sale of residential property will increase from 18% to 24%. The freeze on IHT thresholds have been extended until 2030. However, inherited pensions are being brought into scope in April 2027. Charging IHT on passed down defined contribution pensions is indeed a big change that affects tax planning for many families.
The UK high street has been struggling since the Covid-19 pandemic. The retail, hospitality and leisure relief provided a 75% reduction in business rates capped at £110,000. The Chancellor is maintaining a less generous version of the retail, hospitality and leisure relief of 40% again capped at £110,000. For those retail and hospitality businesses at the smaller end, this could present an increase in their business rates bill. Beyond rates, businesses in this sector face another eye watering increase in operating costs: the rise in National Living Wage and National Minimum Wage respectively by 6.7% and 16.3%, scheduled for next April, is likely to hit this sector amongst others. The combined impact of slightly higher business rates, much higher employment costs and increase in employers’ NIC risks presenting a perfect storm. Alongside these increases, apprentice wages are going up by 18% to £7.55 per hour.
Closer to home, the Chancellor confirmed that Greater Manchester will receive the integrated settlement from the Devolution Trailblazer starting April 2025. The Transpennine route upgrades also received a mention although much of this had been previously committed to under the Integrated Rail Plan for the North and Midlands three years ago.
On investment, the pillar for the Chancellor’s growth agenda, announcements included some previously committed funding under the aegis of the National Wealth Fund. Overall, public sector net investment is expected to average 2.6% of GDP over the term of this Parliament. This amounts to an average £20 billion per annum. This is not substantial. With business taxation going up, the Chancellor may also struggle to drive up private investment. Perhaps, unsurprisingly, the medium-term growth forecasts have been revised down in the OBR’s assessment. The OBR expects the UK economy to grow by 1.1% this year, 2% in 2025 and then slow down reaching 1.5% in 2028. These forecasts indicate that, by the end of this decade, the UK economy will not be significantly larger than it is now, which clearly defies claim of “growth, growth, growth”.
At a time of fragile economic growth and rising public sector debt, the UK faces a profound choice: how to foster a robust economy while preserving the principles of fairness, opportunity and growth. The UK’s economic recovery and longer-term growth lies not in short-term fixes. And it certainly cannot be achieved through burdening businesses, especially small businesses. Policy tweaks to raise more employment related taxes by either actively raising NI contributions or through passive measures such as freezing tax thresholds may seem attractive but invariably go on to have ripple effects that stretch beyond a Parliamentary term. They tend to disproportionately affect small business, who tend to operate on tighter margins and will struggle to absorb the added cost pressure. And if the consequence is that small business owners decide to downsize, curtail business investment on expanding productive capacity or scale down staff training even as consumers facing higher tax bills scale down discretionary expenditure, the very thing the Chancellor is seeking, growth, is in jeopardy. If, in the lead up to the Budget, business confidence and consumer confidence plummeted, there wasn’t much in the Budget to boost confidence barring the consolation that it could have been a lot worse. No doubt, the Chancellor and her team are aware of the principle of unintended consequences. They may just have chosen to ignore it.