Macro implications of the Budget

As the borrowing will now be a bit higher that qualifies as a fiscal easing. However, the government will find it difficult to crank up the extra spending on capital projects quickly, whilst the tax rises will have a negative impact immediately. As a result, the forecast growth figures for 2026,2027 and 2028 are a little weaker than in the Spring Budget forecast. Inflation is expected to come out a little higher, in part because of the higher wage settlements.

Rapid public sector investment is difficult

Capital projects in the UK have a long gestation period, needing planning permissions, licences and reports on a wide range of impacts before getting approval. Much is subject to consultations with the public and with a range of councils and public bodies.

The investment programme for the next couple of years will be largely determined by the projects in the pipeline from the last government. Its experience with both the school-building programme and the new hospital plans was that delays were common. HS2, the main rail project, was subject to substantial delay and a cost overrun, resulting in a major reduction in the scope of the scheme to limit costs.

The new government has increased the NHS commitment to buying more equipment, where private-sector capacity and imports can chip in more rapidly. There may also be an acceleration of computer and technology spend more widely, as the public sector seeks to benefit from higher and productivity and better-quality service that good use of digital processing and artificial intelligence (AI) can bring. Chancellor Rachel Reeves announced an intention to complete HS2 into Euston, new green hydrogen projects, more money to mend potholes in roads and additional cash for affordable housing.

The government has left itself some headroom under its new enlarged borrowing allowance and may find some slippage in spending rates. The borrowing relaxation is not at levels that will undermine the government bond market, against a background of the Bank of England gradually cutting short-term rates.

The October 2022 budget problems in the government bond market occurred at a time when the UK central bank was increasing rates and announcing a large bond sales programme at the same time as the substantial attempted fiscal expansion and difficulties with pension fund investment in gilts.

The money needs to be spent well

Governments always find there is less money to spend than they would like. It forces them to set priorities – and should also act as an incentive to search for productivity and efficiency gains in the way they spend.

So far this century, the UK public sector has suffered from little or no productivity growth, despite the advent of plenty of new computer processing power which should help many government processes. The Health Secretary Wes Streeting has identified this problem as the holder of the largest public service budget and promised reform to accompany extra money in order to boost quality and value for money.

The Chancellor is seeking to get a 2% per annum rise in productivity, which would make a useful contribution to keeping costs down. At that rate of improvement, it will take three years to get back to pre-covid-19 levels of productivity.

Much of the outcome rests on labour productivity. The government has opened with several pay rises well ahead of inflation to buy good will. It is correct that a well-paid well motivated workforce is the best option, but to achieve this there does need to be progress with working smarter to justify the higher real wages. In the case of the railways, there are issues over manning levels on trains as they become more automated that need sorting out at a time when there are large rises being offered.

The government is likely to find boosting outcomes as difficult as its predecessors have. This will mean a return to the NHS asking for more money to bring waiting lists down and an Education Department asking for more cash to improve school performance. This could mean further tax rises to meet the new tougher rule that all current spending must be paid for out of current revenue.

The tax rises will slow things down

Imposing up to £40bn of extra taxes on the economy just after a nasty inflation has hit consumers and companies will act as a brake on growth. The dependence on higher taxes on employers through National Insurance will mean fewer new jobs and employers having to be more careful about pay awards as they tackle the extra costs. Those with pricing power may put through price increases to help meet the bills without damaging margins.

The tax on non-doms has led to more rich people leaving the country, hitting high-end demand and reducing the pools of money for investment in the UK. The imposition of VAT on school fees will lead to some loss of pupils and revenue at private schools, and some increase in the costs of state provision as pupils transfer.

The increase in Capital Gains Tax has led to early sales of businesses and properties and some people giving up on running companies or being landlords. There will be a revenue boost ahead of the budget followed by a fall. The changes to Inheritance Tax (IHT) still offer some offsets for business investment. The increase in CGT on carried interest on private equity fell short of making people pay income tax on the profits, though it still may persuade some private-equity firms to locate elsewhere.

The success of the budget rests on making good use of the extra money going into public services and on finding a range of attractive investment projects that the public sector can speed up. Many of the projects will require a planning phase and then a construction phase this decade, only delivering benefits to the economy from revenue and profits some years hence.

The projects can boost output through the construction spend. Spending on equipment and computing in areas like Health could assist where these purchases can act quickly and do not require major studies and centralisation.