Tax and benefit changes fall on everyone’s shoulders. The combined impact of benefit cuts, employer national insurance rises and consumption tax changes are felt evenly across the income distribution. The poorest half of households face a 0.8% reduction in their annual income on average, while the richest half face a 0.6% decrease. However, increases to capital gains and inheritance taxes (not included in this modelling) are more progressive, so wealthy households will face the largest cash impact overall.
A prolonged pay downturn. The combination of higher inflation and weaker growth stemming from increased taxes on employment, coming on top of an already challenging outlook, mean that real pay is set to stagnate again in the middle of this parliament. As a result, by 2028 real wages are expected to have grown by just £13 a week over the past two decades.
A (public) investment nation…The welcome boost to public investment, preventing the planned cuts set out by the previous government, means that Public Sector Net Investment is set to average 2.6% of GDP over the forecast period. This would be the highest five-year average in the UK since 1980-81, and bring the country close to the OECD average.
…or a stagnation nation? Real household disposable income per person is projected to grow by 0.5% a year on average across the parliament. While stronger than growth during the last parliament (0.3%), it would still be the worst term for living standards under a Labour government, lower even than the 0.8% annual growth recorded in the 2005-2010 Parliament.
Here are the Resolution Foundation’s main findings:
Britain’s National Health State. Health alone accounts for 40% of the overall £35bn real increase to day-to-day public service spending between 2023-24 and 2025-26. As a result, the 2025-26 health budget will account for 42% of all departmental spending, up from 31% in 2007-08.
A tight Spending Review. The decision to frontload public service spending increases into this year and next have created a tough climate for the spending review next spring. Setting a spending envelope that increases by just 1.3% a year in day-to-day spending on public services between 2025-26 and 2029-30 implies £10.8bn of real per person cuts to unprotected departments, sending their funding back to 2015-16 levels.
No margin for error. Having chosen a new debt rule that gives her more headroom, the chancellor has already used it up, with just £9.9bn to spare against the current balance rule, and £16bn against the public sector net financial liabilities rule. Even a modest economic downturn could force the chancellor to come back for more tax rises at a future fiscal event.
Introduction: IMF hails Reeves’ ‘sustainable’ tax rises; Resolution Foundation says budget marks ‘decisive shift from planned cuts’
The International Monetary Fund (IMF) has welcomed the measures announced by Rachel Reeves in her budget yesterday.
In an unusual move, the influential Washington-based financial watchdog backed the increases in investment and spending on public services as well as “sustainable” tax rises. An IMF spokesperson said, according to the BBC:
We support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue.
The Resolution Foundation, a UK thinktank, has published its analysis of the budget and given it a guarded welcome. It said the UK budget has delivered “short-term living standards pain in the hope of long-term growth-based gains”.
The London-based foundation said the first Labour budget in nearly 15 years marked a “decisive shift” from the planned cuts set out by the last government, with better-funded public services and greater public investment coming from higher taxes and more borrowing.
But the budget has not yet delivered a decisive shift away from Britain’s record as a ‘stagnation nation’, with the outlook for growth and living standards remaining weak in this Parliament.
By prioritising extra spending on public services and investment, the chancellor is borrowing an extra £32bn a year by the end of the parliament, with another £41bn coming from tax rises.
Mike Brewer, interim chief executive of the Resolution Foundation, said:
Rachel Reeves’s first ever Budget was never going to be a crowd-pleaser, given the profound and often conflicting challenges she faced, from failing public services to perilous public finances, weak growth and stagnating living standards.
The short-term effect of these changes will be better funded public services – not just across schools and the NHS – but, critically, also in our justice system. But families are also set for a further squeeze on living standards as the rise in employer National Insurance dampens wage growth.
With Britain finally turning the page on its longstanding failure to invest thanks to a £100bn boost to public capital spending, the hope is that this short-term pain will eventually turn into a long-term living standards gain. But if it doesn’t, future budgets won’t be any easier to deliver, especially if further tax rises are needed.
Shell has beaten forecasts with a profit of $6bn for the third quarter, as weaker refining and oil trading revenues were offset by higher gas sales.
This was down slightly from $6.2bn in the previous quarter, and ahead of analysts’ average estimate of $5.36bn. The company said it will buy back a further $3.5bn of shares over the next three months.
The Bank of Japan has left interest rates unchanged at ultra-low levels, as expected, and said it was monitoring global economic developments and any risks to fragile domestic recovery. The yen gained after the central bank’s decision, trading close to 153 per dollar.
BOJ governor Kazuo Ueda said:
As for the timing of the next rate hike, we have no preset idea. We will scrutinise data available at the time of each policy meeting, and update our view on the economy and outlook, in deciding policy.
We have seen some positive US data recently. But there is still uncertainty on how past rate hikes by the Fed affect the economy and prices. We need to monitor developments carefully.
Looking at domestic data, wages and prices are moving in line with our forecast. As for downside risks to the US and overseas economies, we’re seeing clouds clear a bit.
The Agenda
10am GMT: Eurozone inflation flash estimate for October
10am GMT: Bank of England’s Sarah Breeden speaks on AI and financial stability
12.30pm GMT: US PCE index (the Fed’s preferred inflation measure)
