One cannot describe the reaction in financial markets as rapturous. Gilt yields initially fell, which was helpful for Rachel Reeves, but then they rose. By late afternoon, the yield on the 10-year government debt settled towards the upper end of the day’s range. The move wasn’t huge, but it cost the government slightly more to borrow for 10 years than before the chancellor spoke.
Call that a wait-and-see response. Investors aren’t terrified by the prospect of higher government borrowing but, equally, they can see that the plan to make the UK the fastest-growing economy in the G7 probably isn’t going to be realised during this parliament. Even in 2028-29, on the Office for Budget Responsibility’s forecasts, we’ll still be looking at growth in GDP of a lacklustre 1.6%.
For a chancellor with a mantra to “invest, invest, invest”, that is a thin return in the medium term. All those business taxes, notably the rise in employers’ national insurance, have an effect on growth projections and jobs. Indeed, the OBR’s analysis contained the following passage about the effect on the rate of business investment, the economic dial that successive governments have failed to improve meaningfully for years.
The OBR said: “Over the forecast, business investment falls as a share of GDP as profit margins are squeezed, and the net impact of budget policies lowers business investment. Higher government investment increases incentives for businesses to invest but that is more than offset by the crowding out effect of the fiscal loosening.”
Businesses get a “corporate tax roadmap” to encourage thoughts of long-term stability, but one can understand the cries of immediate pain from sectors such as the hospitality industry. “In the short term, the tsunami of employment costs coming in April will ultimately do more to hamper growth than incentivise it,” said Kate Nicholls, the chief executive of UKHospitality.
That is because the rise in employers’ NI, and the cut from £9,100 a year to £5,000 in the threshold, will have the greatest impact on low-earning jobs. The Resolution Foundation noted that employers have had a tax rise equivalent to 6.8% of pay for someone earning £9,100.
The Labour growth mission, it is becoming increasingly clear, is the work of two parliaments at least. It also relies on elements that only had a walk-on role in the budget speech – the interventionist industrial strategy, the National Wealth Fund, the rewiring of the electricity grid, investment in regional transport, 11 new green hydrogen projects and so on.
In aggregate, that all adds up to a £100bn boost to public sector investment over the next five years. Public sector net investment will average 2.6% of GDP over the parliament, or 0.4% of GDP higher than the average since 2004-05. That is the rewiring of the UK economy in action and the boost in capital spending is plainly substantial. But “the prize”, as Reeves put it, only starts to be glimpsed from 2030 in terms of higher growth potential.
Such long horizons are inevitable if you seriously want to change the direction of the economy, but private sector reaction here will be crucial. In the real world beyond the OBR’s modelling, Reeves needs buy-in from boardrooms. The UK desperately needs companies to invest more – still.
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Aim avoids worst fears
The “ongoing viability” of Aim, the Alternative Investment Market for growth companies, would be threatened if 100% business relief from inheritance tax is abolished, said Julia Hoggett, the chief executive of the London Stock Exchange, in the run-up to the budget. In the event, the chancellor opted for 50% relief in “all circumstances” for shares held on Aim and other similar markets.
Share prices on Aim responded positively, but that is probably only because they’d sunk so low in anticipation of the heavier whack. Over the long term, prospects still do not look encouraging. The number of listings is already down to about 700 from 1,700 in 2007, and at the last count about £11bn of investment out of an entire capitalisation of about £75bn could be ascribed to money that was making use of the tax advantage.
Yes, those tax breaks are illogical. But so is allowing Aim to slide slowly into irrelevance. For all its faults and scandals, it is still a unique source of funding and small and medium-sized companies.
