From Andrew Hammond
It is relatively rare for economic events in the UK to cause big political ripples globally. However, last Wednesday’s Budget could be different. Many people, not only domestically but internationally as well, were looking closely at the most important fiscal statement by a British government in a generation.
There are several reasons why the Budget is potentially era-defining, politically and economically, including the fact that, following the party’s victory in the election in July, it is the first fiscal event by a Labour government since 2010, during the final days of Gordon Brown’s administration. Given the huge majority Prime Minister Keir Starmer’s government enjoys in the House of Commons, Labour might well remain in office not only until the end of the current Parliament in 2028 or 2029, but possibly well into the 2030s if a second term is secured, even with a reduced majority. This means this week’s Budget could shape the UK’s political agenda for much longer than the typical annual Budget.
In her statement, Chancellor Rachel Reeves launched what she described as “a new era of public and private investment in hospitals, schools, transport and energy, as momentous as any in Labour’s history”.
What she was attempting to do here was to try to draw political comparisons with the big programs of reforms that began in 1945 under Prime Minister Clement Attlee, in 1964 under Harold Wilson, and in 1997 under Tony Blair.
In addition to welcoming additional private capital, the government therefore announced plans for a step change in public investment. This marks a shift from the plans Reeves inherited from the Conservative administration of the former prime minister, Rishi Sunak, under which public-sector net investment would have fallen from 2.4 percent of gross domestic product this year to 1.7 percent by 2028 or 2029.
The new government wants to boost this proportion significantly, as outlined in Labour’s election manifesto, in which the party pledged to keep public sector net investment at a constant level as a share of GDP. This implies big additional investment commitments each year, especially if the economy grows significantly.
To facilitate this plan, Reeves is redefining the government’s fiscal rules to potentially free up tens of billions of of pounds of additional borrowing to fund long-term investment, while still seeking to deliver on a Labour manifesto pledge to reduce debt as a proportion of the UK economy.
Chief Secretary to the Treasury Darren Jones, who is No. 2 to Reeves in the UK finance team, has announced that a new National Infrastructure and Service Transformation Authority will try to “fix the foundations” of a creaking UK infrastructure system.
To help pay for this huge investment, a very significant net tax rise was announced on Wednesday and the financial markets are still digesting its likely impact.
Certainly, tax hikes are far from unprecedented immediately following an election. However, the fiscal measures unveiled by Reeves this week amount to a tax take of about £40 billion ($52 billion). This comfortably exceeds the £14 billion and £13 billion, in today’s prices, of her predecessors, Gordon Brown and George Osborne, in their first Budgets in 1997 and 2010 respectively. Indeed, it is most comparable, in real terms, to Norman Lamont’s fiscal plan in 1993, which was the biggest tax-raising Budget in half a century.
In the coming years, the acid test for how many people perceive the success of the Budget will be whether it succeeds in boosting economic growth. This reflects the context in which it was prepared, which dates back more than a decade and a half to the 2007/08 international financial crisis. Since then, economic growth in the UK has flat-lined compared with the era immediately before it, and many people around the world will be watching closely to see whether the country can get out of this funk.
So with the No. 1 mission of the Starmer government perhaps being its attempt to rejuvenate growth, Reeves highlighted the latest economic forecast from the independent UK Office for Budget Responsibility. This indicated a modest upside in 2025, in part because of falling interest rates, but was less optimistic about the several years immediately afterwards, which will be a cause of concern for the government.
Nonetheless, Starmer’s team will seize on the 2025 upside in its keenness to move the economic narrative away from fiscal “black holes” to more optimistic mood music. This includes a focus on the UK’s long-term growth potential into the 2030s, fueled by a fresh wave of investment to deliver on goals that go well beyond tackling crumbling national infrastructure, to such efforts as becoming a “clean energy superpower.” –FP
