Geopolitics Review - 4th November 2024
The UK's Labour Autumn 2024 Budget: Key Takeaways
Contents
Introduction
Key Budget Takeaways
The Budget Risks
Opposition Response
Concluding Remarks
Other Budget Items
Other News In Geopolitics This Week
Bitesize Edition
This budget proposed by Labour is deemed as one of the biggest ever. It certainly was hefty, and that gives me much to discuss. The notes I initially made were rather disorganised. I hope this piece can bring a level of organisation to those notes.
Prior to the budget, Labour had put themselves in a somewhat difficult position. They vowed no changes to National Insurance, Income Tax, VAT, or Corporation Tax. These four taxes make up close to two-thirds of tax receipts in the UK. With Labour also stating they wouldn’t return to austerity that occurred under the Tories, they had to find money to spend from somewhere. Since we’ve seen what excessive borrowing can do when Liz Truss lasted 45 days as Prime Minister, we know that also isn’t an option. All roads pointed to tax rises, but this provided opposition political parties with some fuel with which they could seek to burn Labour. After the budget did see rises in National Insurance for employers, Sunak accused Labour of breaking promises from their manifesto.
In response, Reeves has been questioned extensively over the last few days. The response by Reeves and Labour was that these tax rises wouldn’t affect working people. But the politically independent OBR predict that 75% of the effects of the National Insurance rises would be felt by working people through lower wages or increased prices as businesses seek to protect their profits.
And so, as we reach this impasse, it seems prudent to dive into the budget deeper. What is good about the budget, what is risky about the budget, and where does the budget seek to put the UK in five years? Let’s explore.
Introduction
As most people do on their birthday, yesterday I spent my 26th birthday collecting my thoughts and organising my notes on last week’s UK autumn budget. I’ll allow a temporary pause for applause.
Watching the budget last week made it easy to get confused and bogged down in what was a hefty budget. I took pages of notes that as a final product made very little sense. This week’s Geopolitics Review is my way of making sense of the very mess I created on those pages.
Key Budget Takeaways
The biggest story in the budget was the rise in employer contributions to National Insurance. National Insurance is a tax on earnings, paid by both employers and employees. Four large changes have been proposed to National Insurance:
Reducing the secondary employer National Insurance threshold from £9,100 to £5,000 per year. This refers to the level at which an employer starts paying National Insurance contributions for an employee.
Increasing the rate of secondary employer National Insurance contributions from 13.8% to 15%.
All employers can claim Employment Allowance.
The amount each employer can save will rise from £5,000 to £10,500.
This was one of the largest proposed budgetary policies, predicted to earn just under £24B in net revenue in 2025/26.
For an example calculation, let’s take an employee who earns £10,000 per year.
Previously, the following payment would have been made:
Applying the previous percentage rate of 13.8%:
With the newest changes, we have the following payments:
And with the new rate of 15%:
Looking at this example paints a picture where small business suffers greatly. If a small business had created some room in its budget to hire new staff members, this rise in national insurance contributions could heavily affect this.
This is where the third and fourth bullet points from above enter the story. Eligible employers can reduce their annual employer National Insurance contributions by a set amount. Previously, this was a total reduction of £5,000. This will rise to a potential total reduction of £10,500. Essentially, if we have a small business that has a total annual national insurance payment of less than £10,500, they could recover their National Insurance payments in their totality.
The effects of this policy will be told over time, but the employment rate would be a place to look for any significant changes.
This change to National Insurance came as a shock to some as Labour had previously stated they wouldn’t touch taxes, especially National Insurance, Income Tax, and VAT. Those speaking against the Labour budget quip that Labour went against their promises. In response, Labour stated they wouldn’t raise taxes on working people. It’s up to you where you believe judgement falls, but Labour should have been clearer in their wording. After 14 years in opposition, it’s foolish for Labour to provide fuel for opposition parties so freely.
Reeves said she started to realise the severity of the public finances after Labour was elected, but Labour shouldn’t have sugar-coated this for four months. They were elected in July, yet still didn't pursue any level of damage limitation from this decision with National Insurance. They can attempt to paint the situation they find themselves in as an effect of the previous Tory leadership, but with them in power today, any negativity will be directed at Labour.
In the days after the budget, many analysts stated that employees would feel this tax rise as employers would lower wages or raise prices to limit the negative impact this policy would have on business profits. It is an issue getting larger businesses to pay their fair share, especially in sectors with more monopolistic characteristics. These companies can set prices unchallenged, maintain greater control and power, and focus on improving profitability year-over-year to incite further investment. It’s also these businesses that typically possess the greatest resources to drive innovation. In the UK, a lack of innovation and productivity has seen the UK struggle to develop and stand out in new sectors that could grow in the future. Labour is well aware of this issue.
On some occasions, regulation can limit productivity, a trend running throughout many of these budget policies. Starmer has stated he wants to strip out the red tape hindering the UK’s lack of productivity, and some budget policies supported this. So, what budget policies are seeking to address and fuel productivity and innovation:
Life Sciences Innovative Manufacturing Fund
Innovation Accelerators Programme Extended
£20B of Funding For Research and Development
Gigafactories, Ports, And Green Hydrogen Funding of £3.8B. Includes 11 UK Green Hydrogen Projects
£1B For Aerospace Sector
£2B For Automotive Sector
Merseyside and Teeside Carbon Capture and Storage Investment
There was also a heavy focus on improving and modernising existing infrastructure in the UK. The transport, education, and energy sectors are a great place to start. By shifting unproductive ageing infrastructure with productive spending, the UK can become a place where forward-thinking in transport, education, and energy become the norm. Especially as the automotive industry is changing with electric vehicles and synthetic fuels, the education sector is in dire need of reform especially in specialised practical jobs, and our energy world is shifting dramatically towards cleaner fuels.
These sectors are but a small portion of potential development that will shape the future of the planet and place the UK at the forefront of strategy in these areas if pursued successfully. The following budget policies will seek to aid this:
£5B Of Government Investment On Housing Next Year
Labour Launch 10-Year Modern Infrastructure Strategy
£500M Broadband Coverage Boost
School Funding Increased By £2.3B
£2M For Holocaust Education
£1.3B For Local Grants For Government Funding
£1B Special Education Needs Funding
£1B To Remove Faulty Building Cladding
Rail Upgrades: Electrification of York to Church Fenton, Oxford To Bedford Line Running By 2030
HS2 Old Oak Common Route, The Euston Tunnel To Be Dug
£1.3B In Connectivity Improvements
£650M In Local Transport Funding
Bus Fare Cap Extended To 2025, Raised To £3
£500M In Road Maintenance
£3.4B To Scottish Government
£1.7B To Welsh Government
£1.5B To Irish Government
£2.1B To Improve School Maintenance. A £300M Increase
£6.7B To the Department of Energy. A 19% Real Rise
Triple Investment In School Breakfast Clubs
Increase Energy Profits Levy From 35% To 38% On Oil and Gas. Maintain Decarbonisation Allowance
VAT on Private Schools
As for health and the NHS, with a lack of resources and high waiting times the norm, new strategies are needed to reinvigorate the health service. The following strategies were proposed as a part of the budget:
£1.5B For New Hospital Beds
£1B To Address NHS Backlog of Building Repairs
NHS 10-Year Digital Shift Plan, Shifting Focus To Local Community Instead of Regional Hospitals
£22.6B Increase In Day To Day Health Budget
Lord Darzi’s NHS Report Mentioned
£3.1B Increase In Capital Budget For Health
NHS Waiting Times Aiming To Be No Longer Than 18 Weeks. 40,000 Extra Appointments
Wes Streeting New Hospital Program
Tobacco Duty Renewed, Vaping Liquid Levy
Increased Soft Drink Levy
Other large budget proposals were the planned raising of minimum wage, the UK National Wealth Fund, and the changes to how debt is measured. The minimum wage will rise to £12.21 per hour, and for 18-20-year-olds, a rise to £10 per hour will occur. For those on minimum wage, these will be welcomed changes. Since wages can’t be lowered below the minimum wage by law, these employees likely won’t be affected as heavily by the potential changes of lower wages driven by the National Insurance tax changes. They would, of course, be susceptible to higher prices.
As for the UK National Wealth Fund, the Labour government has stated the return of the fund is expected to outperform GILTS. Its success will likely be determined by this metric, and the UK hopes this will spark investment in its projects. Unlike National Wealth Funds elsewhere, like in Norway where oil revenues contribute to the fund, the UK fund is focused on improving infrastructure, inciting innovation, and pursuing energy projects. As I’ve discussed many times before, these projects have to garner a positive return for a fund such as this to be successful. This has been difficult, especially in energy projects in the developed world, where cost and schedule overruns have made positive project returns seem unlikely.
Finally, in what is one of the most misunderstood aspects of the budget, Labour has changed the definition of debt. The specific terms are a shift from “public sector net debt” (PSND) to “public sector net financial liabilities” (PSNFL). In order to give more wiggle room, PSNFL includes a wider range of liabilities, but this is netted off against a wider range of assets held by the public sector which might expect a return. The aim is that this improves the balance sheet and will enable close to £20B of additional borrowing to occur without impacting the commitment to reduce debt as a percentage of gross domestic product. It is worth noting although this seems like fiddling with the books, this measure has been used for many years by the OBR as a supplementary measure. It has now been adopted as a primary fiscal target. This won’t stop opposition from referring to it as fiscal fiddling, however. Reeves did initially state no such fiddling would occur, another part of this budget where Labour has shot themselves in the foot with previous promises and remarks.
As we’ve explored the key policies this budget includes, what are some of the risks?
The Budget Risks
What is somewhat worrying, is the headroom the Chancellor has left herself. With around £10B of wiggle room on this budget, all it takes is an overspend on a delayed or more costly part of the budget, a part of the budget saving less than expected, or an aspect of the budget providing less of a return than anticipated, and the wiggle room could suddenly become rather tight. Hence, the success of this budget depends on the productivity and efficiency of spending. Reeves’ aim of 2% productivity growth in all government departments will be a key measure to keep monitoring to assess the success of this budget’s high spending. If productivity growth is less than 2%, we could well be in the same position in three years, where Labour’s expectation of a 2027/2028 budget surplus could be replaced by a need for greater borrowing. This would likely not go down well.
Another area of uncertainty is the income from investment-based policies, namely the rises to Capital Gains Tax, with the lower rate rising from 10% to 18%, and the higher rate rising from 20% to 24%. It’s suspected this will raise £2.5B but could see wealthy individuals leave the UK. To what extent this occurs will be told over time, but the uncertainty is there, placing further pressure on the £10B of wiggle room. With such a large budget with high spending, uncertainty is a given and it could arise from many elements of this budget. Labour certainly have a job on their hands. The budget is optimistic.
Finally, the questions arise as to how this will affect the economy. What of growth, inflation, and interest rates?
After the budget, the Office for Budget Responsibility proposed their predictions for how this will affect the UK economy. The key takeaways from the OBR’s report were increased spending of £70B per year over the next five years. Around half of this is paid by the tax changes. This pushes taxes as a percentage of GDP to its highest ever of 38% of GDP. The other part of spending is paid by borrowing.
Economic growth is expected to be 1% this year, and 2% in 2025, before falling to 1.5% over the three years after that. This is because policies temporarily boost GDP via spending output, especially in infrastructure projects. However, over the five-year period, GDP remains unchanged. This has led some to believe after 2025, more borrowing could be requested to fuel further GDP growth. Hence I’ll say again, the importance of productive and efficient spending in this budget is vital. If spending is productive, it will garner a return. This will limit the chances of further borrowing in a few years. If not, one of the largest fiscal borrowings ever will have occurred in this budget, and the UK will possess very little to show for it.
Inflation is predicted to be higher over the 5 years covered by the budget, with CPI rising to 2.6% in 2025 before slowly falling back to the target of 2%. It seems this 0.5% peak inflation rise will be driven by monetary spending and demand, not supply-side issues. As I’ve also discussed before, in a world of shifting supply chains, nearshoring, friendshoring, and rising geopolitical tensions, supply chain issues can arise. The OBR predict this excess demand will become balanced by the end of the budget due to monetary policy decisions, such as via interest rate policy.
Interest rates are expected to stabilise at 3.5%, 0.5% higher than before this budget, in part due to the inflationary pressures the budget spending contributes to. With higher interest rates come the potential for higher UK bond yields. As one of the market measurements for stability, GILT volatility could further fuel financial uncertainty.
A final point of discussion is the current budget deficit in the UK. A deficit means a country is spending more than it brings in, whereas a surplus is the opposite, bringing in more than it spends. Borrowing of £127B this year is expected to fall to £71B in 2029. The government expects the UK to be in budget surplus by 2027/28.
Of course, with Labour proposing their budget that took well over an hour, the opposition then had a chance to speak on their initial response to the budget. Rishi Sunak’s speech was passionate and revolved heavily around the £22B black hole that Labour has accused the Tories of creating. The hole wasn’t in fact £22B in size, and this has led to confusion and criticism. I’ve referred to Labour providing fuel for the opposition multiple times in this piece, let’s explore how the Tories used it.
Opposition Response
Sunak’s response to the budget in his final parliamentary appearance as Conservative leader gained great praise and was one he clearly enjoyed. He accused Labour of inciting uncertainty, excessive borrowing, politicisation of the independent Office for Budget Responsibility, and fiscal fiddling regarding what was described by the Conservatives as a “fictional” black hole. Reeves back in November 2023 had stated she wasn’t going to “fiddle the figures or make something to get different results”. The changing definition of debt will continue to be interpreted this way by political opposition in the UK.
The Tories also utilised Labour’s own manifesto against them, saying no raise on Income Tax, National Insurance, VAT, or Corporation Tax would occur. Is this a broken promise of Labour’s manifesto after the National Insurance changes? Those in support of Labour say the party implied the tax rise would not apply to working people. Yet, if Labour continues to use this line after the OBR has said 75% of the National Insurance tax rises will be felt by working people, they will be digging themselves a deeper hole.
Sunak described the budget wasn’t fair, and didn’t pursue Labour’s promise to balance the books, with £127B being borrowed this year. As discussed above, The OBR predicted inflation, borrowing, and debt over the following years to be higher than this year, adding fuel to Sunak’s remarks.
Sunak stated in this speech that cutting the civil service could lead to £30B of savings. This suggestion would put upward pressure on unemployment. Sunak aimed to increase productivity and streamline efficiency within government, but a change so dramatic could have harsher secondary and tertiary consequences, including having the opposite effect, leading to stagnation in government due to spending cuts.
Sunak also stated the UK was the fastest-growing advanced economy in the world prior to his loss in the election in July (at 4:44). If this is referring to G7 economies, then experts warned this growth wouldn’t be sustained. The statement is also completely untrue, with US growth bettering the UK GDP growth in Q1 and Q2 2024.
The Sunak speech brought issues to the table that Labour will have to address. There is a lot of borrowing, and there is uncertainty involved in the high levels of spending. Labour has attempted to construct a budget for the working people of the UK, but the actual effects will take time to navigate their way through the different branches of society to which this budget is pertinent. Is the idea that businesses can pass negative impacts onto their workers a flaw in the system that needs changing, or is it a fact of life? Perhaps a topic for another day, but it has potential to affect the impact felt by this budget on working people.
In another difference of opinion between both sides of the House of Commons, let’s return to the £22B black hole. To determine this, let’s look at what the neutral Office for Budget Responsibility states. The OBR states that in March, the Treasury had a £9.5B hole of pressures on budgets in 2024/2025 which they didn’t share with the OBR. This lack of Treasury transparency means the OBR couldn’t fully account for future liabilities. They would have then come to a different conclusion about the upside in department spending but couldn’t state today how big the budgetary pressures would be. Sounds like a smart way to remain politically independent. The OBR acknowledges the budgetary pressures in alignment with Labour’s narrative but doesn’t substantiate the £22B figure.
With Sunak and the Tories speaking out aggressively against Labour’s budget, it’s prudent to compare it to the last budget proposed under Rishi Sunak’s Conservative government.
Employee National Insurance Cut From 10% to 8%
Personal Tax Cuts Worth £20B. Personal Tax Rate For Average Earner Lowest Level Since 1975. Lead To 200,000 Extra Full-Time Workers By 2028/29.
NHS To Receive £2.5B Day-To-Day Funding Boost, and £3.4B Capital Investment
Freeze To Fuel Duty and Alcohol Duty
Tax Reliefs To Establish UK As A World Leader In High Growth Industries
0.2% Economic Growth In 2028-29, Meeting Fiscal Rules
£360M For Life Sciences, Automotive, and Aerospace Sectors
£45M For Medical Research
Non-Dom Tax Regime To Be Abolished, Raising £2.7B By 2028/29.
Energy Profits Levy Extended, Raising £1.5B
Higher Rate of Capital Gains Cut From 28% To 24%
The first conclusion is that this Spring 2024 budget under the Conservatives was much easier to digest than Labour’s Autumn budget. The Conservatives wanted to incentivise investment through favourable conditions for investors and reduced tax burdens, whereas Labour is seeking improvements to public spending to incentivize further investment into promising projects that garner a return through higher taxes. I’d argue the latter seems more prudent, with the UK stagnating in more aspects than one. I always ask myself, what is the UK known for that today is value-added? London as a financial centre is losing influence to Frankfurt after leaving the EU. We need something new. That has to come through productive spending that garners a return. The pursuit of green hydrogen is one such area where the UK has the potential to be a leader in the world. Any sentence that includes a new innovative sector and the words “UK” and “leader in the world” should be pursued.
Concluding Remarks
The best way I can think to sum up this budget is optimistic, but I’ll ensure I keep an eye on the effects that come from it. The budget is large with high levels of borrowing. With any forecast, especially when attempting to predict the future on a longer time frame, we become more and more uncertain. Labour’s budget certainly has elements of this uncertainty. It will take time to be acted upon and depends on the efficiency of spending and the hope for increased productivity. If we don’t achieve this, in two years, will Labour have to return and borrow even more, thus not hitting the projected budget surplus and going against their aims to reduce debt as a percentage of GDP?
The innovation aims are also very optimistic. Work certainly needs to be done, and it won’t be seen yet. The question now becomes, when do we first see these optimistic changes? Secondly, in two years, where does the UK find itself? Whatever world we find ourselves in, it will determine the success of Labour’s budget and Labour’s government as a whole.
As I’m sure many are aware, it’s the U.S. election this week. I’ll post a key takeaways post on Wednesday, as well as updates on Substack Notes throughout the election fallout. Keep an eye out for those. For secondary and tertiary order effects of the election, I’d argue no other event will have such an impact on geopolitics for a very long time.
Other Budget Items:
£11.8B Infected Blood Compensation
£1.8B For Post Office Crisis
£3B Guarantee For Ukraine As Long As Necessary
UK Strategic Defence Review For 2025. Maintains 2.5% Of GDP On Defence
Ministry of Defence Budget Raising To £2.9B
Lower Tax Rates For Retail, Leisure, Hospitality Property
Stamp Duty Land Tax. Increase Stamp Duty On Second Homes By 2%, To A Total of 5%. Other Stamp Duty Changes Not Included In Budget
Carried Interest Rising To 32%
Day-To-Day Government Spending To Rise By 1.5% In Real Terms. Department Spending To Rise By 1.7% In Real Terms
Labour Corporate Tax Roadmap. Capped At 25% For the Next Five Years
Non-Dom Tax Regime Abolished. New Residency-Based Tax Scheme
Extended Temporary Repatriation Relief To 3 Years
40% Relief For Retail Sectors
Small Business Tax Multiplier Frozen
Labour Alcohol Duty Rates Align With RPI. On Draft Alcohol Falling By 1.7%
2% Productivity Growth Targets For All Government Departments
COVID Corruption Commissioner To Be Appointed
Expansion of Welfare Fraud Team
Inheritance Tax Freeze To 2030, Especially On Farmland
Get Britain Working White Paper Expected Next Year
Increased Interest On Unpaid Tax Debt
£25M To Welsh Government To Maintain Coal Tips
GB Energy In Aberdeen
Crackdown On Shoplifting
Pension Guarantee Payments To Rise
UK Air Passenger Duty on Private Jets To Rise By 50%
Labour Maintain EV Tax Incentives
Other News In Geopolitics This Week
Biden's Envoys In Israel To Pursue Israel-Hezbollah Peace, Again
Canada Accuses Amit Shah, Indian Minister and Modi's Closest Aid of Being Behind Assassination Plots
Kurdish Democratic Party Wins Parliamentary Election In Semi-Autonomous Kurdistan Region In Iraq
Lebanese PM: Israel-Hezbollah Ceasefire Possible In Next Few Days
Pentagon Warns Of No Limits on Ukraine Support If North Korea Joins War
Starmer To Increase University Tuition Fees, Despite Previous Calls To Cut Them
US Approves Weapons Sale To Riyadh Despite Iran-Saudi Drills
WSJ - Iran Preparing Complex Response To Israel With More Powerful Warheads
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Sources:
https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/methodologies/publicsectornetfinancialliabilitiespsnfl
https://www.gov.uk/government/publications/autumn-budget-2024
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https://kpmg.com/ie/en/home/insights/2024/10/uk-budget-2024-tax.html
https://obr.uk/forecasts-in-depth/forecast-methodology/
https://www.statista.com/statistics/280383/unemployment-figures-in-the-united-kingdom-uk/
https://www.theguardian.com/education/2024/oct/31/private-schools-to-take-legal-action-against-planned-vat-on-fees
https://energysavingtrust.org.uk/budget/
https://www.bbc.co.uk/news/articles/cj0j2mj763do
https://www.gov.uk/government/publications/increasing-the-rates-of-the-soft-drinks-industry-levy/soft-drinks-industry-levy-uprating
https://www.bbc.co.uk/news/articles/cy0l99xz719o
https://www.gov.uk/government/news/chancellor-delivers-lower-taxes-more-investment-and-better-public-services-in-budget-for-long-term-growth