Geopolitics Review - 4th November 2024

The UK's Labour Autumn 2024 Budget: Key Takeaways

Contents

1. Introduction

2. Key Budget Takeaways

3. The Budget Risks

4. Opposition Response

5. Concluding Remarks

6. Other Budget Items

7. Other News In Geopolitics This Week

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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.

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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.

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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:

\(10,000 - 9,100 = 900\)

Applying the previous percentage rate of 13.8%:

\(900 * 0.138 = £124.20\)

With the newest changes, we have the following payments:

\(10,000 - 5,000 = £5,000\)

And with the new rate of 15%:

\(5,000 * 0.15 = £750\)

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.

https://www.cnbc.com/2024/10/30/uk-budget-labour-rachel-reeves-october-2024.html

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

Photo by Mark Stuckey on Unsplash

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?

Photo by Irene Bersani on Unsplash

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The Budget Risks

What is somewhat worrying, is the headroom the Chancellor has left herself.