Resolution Foundation - Chancellor Provides £326 Billion Boost To Public Services And Investment, Funded By The Biggest Tax Rises On Record And Higher Borrowing

31st October 2024

The Chancellor has set out plans to boost real-terms spending on public services and investment (TDEL) by £326 billion (in current prices) across the next five years, funded in part by the biggest package of tax rises on record, the Resolution Foundation said on Wednesday in its quickfire analysis of the Budget.

In the first ever Budget to be delivered by a female Chancellor, Rachel Reeves sought to take on two key challenges facing Britain: failing public services and weak growth. Her task was set against a backdrop of perilous public finances, while her room for manoeuvre was further limited by unwisely restrictive Manifesto tax pledges.

The Chancellor has sought to address this first challenge by largely avoiding the real per-person cuts to unprotected departments implied by Jeremy Hunt's plans. The £44.1 billion boost (in 2029-30) to day-to-day public services spending (RDEL) announced today is the biggest real-terms increase since the 2000 Spending Review. However, with funding increases concentrated in the current and next financial year, departmental budgets are likely to remain very tight at the back of the Parliament.

The Chancellor has announced £41 billion worth of new tax rises by 2029-30 in order to meet the ‘current balance’ fiscal rule. These new tax rises, coupled with upcoming tax rises announced by the previous Government, mean the UK’s tax to GDP ratio is set to hit a record high of 38.3 per cent by 2027-28. The UK’s projected tax take by the end of the Parliament will be higher than Spain’s today, but lower than Germany and the Netherlands.

The Chancellor’s package of tax rises included welcome revenue raising reforms to Inheritance Tax and Capital Gains Tax (CGT), together raising £4.8 billion a year by 2029-30, and a major £25.7 billion rise in employer National Insurance (NI) contributions, which broadly reverses the employee NI cuts announced by Jeremy Hunt in the run-up to the last election.

The decision to raise so much from employer NI comes with risks, says the Foundation, with the tax rise falling heavily on low-earning jobs, and bogus self-employment being further incentivised. The decision to increase the Employment Allowance also further increases the tax system’s bias towards small employers.

The Foundation notes that cutting the employer NI threshold and increasing the rate to 15 per cent means employers have had a tax rise equivalent to 6.8 per cent of pay for someone earning £9,100 (and 2.9 per cent for someone earning £30,000). With labour costs rising for both low and very high earners (as employer NI contributions are uncapped), firms in the hospitality and banking sectors are likely be most affected by these changes, says the Foundation.

The biggest winners from recent NI changes are self-employed workers as they have benefitted from a 3p rate cut, but don’t pay any employer NI. The Foundation finds the total tax due on £50,000 of work is now £5,000 higher for an employee (at £15,000) compared to a self-employed worker (at £10,000). This incentive to take on self-employed workers is a concern for both individuals - who will miss out on the Government’s new package of employment protections – and for the Treasury itself, which risks losing considerable revenue.

The Budget also puts a substantial package of new investment in place to address the challenge of weak growth with a welcome £100 billion boost to public-sector investment over the next five years, relative to cuts penciled in by Rachel Reeves’ predecessor. Public sector net investment will average 2.6 per cent of GDP over the Parliament, rather than fall to 1.7 per cent. The OBR estimates this will eventually boost GDP by up to 1.4 per cent.

Today’s package is a significant fiscal loosening compared to Jeremy Hunt’s plan, missing the old ‘debt rule’ by around £6 billion. This measure of debt is projected to peak at 95.8 per cent of GDP in 2029-30.

Instead, the Chancellor switched to a Public Sector Net Financial Liabilities fiscal rule. This is a step in the right direction, says the Foundation, and should help the UK move away the from its longstanding low investment malaise that has left the UK falling behind its peers.

However, while the Chancellor has made a start on confronting the economic challenges of austerity and stagnation, the UK remains a long way from having plentiful public-service provision and strong economic growth.

Health and education account for three-fifths (60.5 per cent) of the overall increase in day-to-day spending between 2023-24 and 2025-26, while unprotected departments such as Justice, the administration of Department of Work and Pensions and Housing and Communities departments receive substantial real terms per person increases of 7 per cent, 13 per cent and 8 per cent respectively.

But despite this increase, it is likely that pockets of austerity will remain over the Parliament as a whole. By 2029-30, unprotected departments are left with implied real terms per person cuts of £8.2 billion compared with 2024-25.

Finally, while the Chancellor has significantly reversed the previous Government’s plans to cut public service spending and public investment – and even found £3 billion to extend Fuel Duty cuts by a year – she has kept in place the two-child limit and the benefit cap, and the Local Housing Allowance remains frozen from next year.

The Foundation’s analysis shows that an additional 63,000 children will be affected by the two-child limit between now and April 2025 and, were it to remain in place, an additional 213,000 children would become affected between now and April 2026.

Mike Brewer, Interim Chief Executive at the Resolution Foundation, said, "The first Labour Budget in 15 years was an historic moment, and huge in both tax and spend terms. Rachel Reeves announced £326 billion of extra funding for public services and investment across the parliament, funded by the biggest tax rising Budget on record along with extra borrowing.

"The Chancellor has done a reasonable job of ensuring a balanced package of tax reforms. Essentially, she has more than reversed the last Government’s pre-election National Insurance cuts with post-election National Insurance rises. But there are winners and losers in this convoluted policy reversal, with self-employed workers and small businesses being the big winners and firms employing lots of low or very high earners worse affected.

“The Chancellor has delivered a Budget that engages with the seriousness of Britain’s economic challenges. But it is only the first step of what will be needed to secure strong public services, end stagnation, and lift living standards for all.

“And while the Chancellor has confronted Britain’s austerity challenge, she has kicked the can down the road on Britain’s equally pressing poverty challenge until next Spring at the earliest. A failure to reverse damaging welfare cuts could see over 200,000 more children affected by the two-child limit."