Is Rachel Reeves' Budget Bad - Or Good - For Business?

3rd November 2024

The Institute for Government examines how the budget affects business.

How might the budget's incentives and investments determine the future course of the economy?

Business has been ‘hit' with tax rises, notably a hike in employers' national insurance contributions.

Giles Wilkes says Rachel Reeves' budget marks a clear break from the approach of the government before - but it is far too soon to make judgments about what it means for business

What should we make of the impact of Rachel Reeves' budget on business? It is reasonable to question that question. There is no such thing as the archetypal business, which if it existed could have its financial situation dissected and its incentives unpacked, thereby revealing the whole economy's response in terms of investment, growth and job-creation. Moreover, the chancellor unveiled 70 different policy measures, from a swingeing hike in employers' national insurance contributions (NICs) and an uprating to the soft drink levy to a freeze in fuel duty. Together these are impossible to generalise about.

Another natural response is to declare this budget as obviously bad for business, because it is business that has been ‘hit' with tax rises, notably that hike in NICs but also a slew of smaller measures. Interest rates are also higher, which raises the cost of finance. The money raised has been directed towards public services. Therefore (so goes the response) the answer is simple: this is a budget that takes from companies (the real wealth creators) and hands it over to the state. Bad for business, good for Whitehall.

But this is too simple. We should remember that legal and economic tax incidence are different; companies may pay those higher national insurance contributions, but their effect will land on consumers (through higher prices), workers (through restrained pay growth) and owners (through lower profits). Ultimately, people pay taxes. Calling it a hit to business can confuse matters.

This is why it is too simple to divide the country into blocs (business, workers, government, etc.) that wrestle for advantage from one other. Their interests ultimately merge; "business" also benefits from the provision of public services, for example. Furthermore, the higher near-terms growth that the Office for Budget Responsibility (OBR) forecasts will impact business through higher revenues; the OBR sees Nominal Gross Domestic Product - roughly the amount spent in the economy - being £80bn higher next year. That effect needs to be considered alongside the hit from taxes.

In my view, a more analytically solid way of judging the budget is to consider its effect on the incentives and investments that determine the future course of the economy.

The full article examines a number of points under thee following headings -

The budget has damaged the incentive to hire

A perverse bias towards the self-employed remains

Adjustments within the NICs system have protected the very smallest companies

The government has not delivered yet on its promise of a wholesale business rates review

The government has passed up the opportunity to use this budget to reform taxes in a more pro-growth way

The rise in capital spending ought to boost business productivity; the big question is about ‘crowding out or in'

The government is aiming to achieve fiscal and macroeconomic stability

Read all the details in the full article HERE