Key headlines
The Chancellor of the Exchequer Rachel Reeves has delivered the first budget of the new Labour government followed by a full fiscal statement by the Office for Budget Responsibility (OBR). Among the notable headlines is the emphasis on economic growth, a marked increase in public services spending, a portfolio of new financial investments and a substantial rise in taxes, raising £25 billion a year by the end of the parliamentary term.
Public sector investment
Public sector net investment is set to average 2.6% of GDP over the forecast period, spending £19 billion more on public investment than previously planned. This would be the highest five-year average in the UK since 1980/81, bringing the country close to the OECD average. Taking a closer look at spending, much of it is front-loaded, with around 60% of the real-terms increase taking place within the first two years of the parliamentary term.
Tax rises
Conversely, tax is now on a path to 38.2% of GDP, the highest level ever in the UK. The biggest rise in revenue will come from an increase in employer National Insurance contributions, both through an increase in the rate (+1.2%), and a reduction in the earnings threshold at which employers start paying (from £9100 to £5000).
GDP growth
Following the Autumn Budget, growth forecasts by the OBR have been slightly upgraded from the spring. GDP growth is forecast to grow to 2% in 2025, settling at 1.6% by 2030. While growth predictions are somewhat disappointing, the OBR estimates that in the longer term, extra investment, planning reform and greater stability should boost growth and output in a sustainable way, though not until 2032
With reforms to the fiscal framework and new debt rules, the increased borrowing has left little headroom for manoeuvre, meaning investments will face greater scrutiny and will need to be spent well or risk incurring higher debt interest over a longer period of time.
Infrastructure delivery
Finally, in line with Labour’s pledge to “rebuild Britain”, there is a positive outlook ahead for infrastructure delivery, local and regional development, and the several growth sectors supported by the National Wealth Fund.
To deliver public services, the Chancellor of the Exchequer has announced £1.3 billion in additional grant funding to local authorities in England, £3.4 billion for Scotland, £1.7 billion for Wales and £1.5 billion for Northern Ireland. Across key sectors, £100 billion will be invested into clean energy over the next five years. There will be a £22.6 billion increase in the day-to-day health budget for the NHS; £6.7 billion in capital investment for the Department for Education; £2 billion for the automotive industry; £500 million more for highways maintenance; £5 billion for housing development; £1 billion for aerospace; and the reinstatement and delivery of several rail projects across the country.
The growth mission
A report from BCG Centre for Growth published earlier this year revealed the UK has underinvested in infrastructure, overall averaging 19% of GDP in the 40 years to 2019, the lowest in the G7. The Autumn Budget now targets 2.6% of GDP to be spent on public sector net investment, on average, over the parliament, with an increase of £100 billion in capital investment over the next five years.
Several rail schemes have secured funding:
- The Transpennine Route Upgrade between York and Manchester via Leeds and Huddersfield, laying the ground for Northern Powerhouse Rail. By the end of 2024, fully electric local and regional services are expected to be operational between Manchester and Stalybridge, with electrification planned for the route between Church Fenton and York by 2026.
- East West Rail will connect Oxford, Milton Keynes and Cambridge. The first East West Rail services will begin operations next year, running between Oxford, Bletchley and Milton Keynes. The Marston Vale Line will be accelerated to ensure the service extends to Bedford from 2030. The government is launching a consultation to deliver the next stages of East West Rail, with a date yet to be confirmed.
- HS2 Phase One will be progressed to improve connectivity between London and Birmingham and increase capacity on the West Coast Mainline. HS2 trains will run to Euston with funding allocated for tunnelling to the Central London terminus at Euston, for Old Oak Common.
- Several railway schemes have been announced, including upgrades at Bradford Forster Square and Manchester Victoria and electrification of the Wigan Bolton line.
Funding includes the following schemes:
- An extra £500 million for highway maintenance was announced to deliver Labour’s manifesto pledge to fix an additional one million potholes each year. Contractors may see this as an opportunity to promote preventative maintenance to prevent potholes.
- Over £650 million was announced for local transport funding to improve connections across towns, villages and rural areas.
- The total amount allocated for highway maintenance in England this year is now just over £1.625 billion:
- Highways Maintenance Block (HMB) Needs element: £500 million
- HMB Incentive element: £125 million
- Pothole funding: £500 million
- Extra funding added: £500 million
The budget confirms £162 million of investment over 15 years for Northern Ireland’s rural regions to support economic growth, subject to value-for-money assessments. The government also confirms £25 million for the ten-year investment in the Argyll and Bute City and Growth Deal to drive inclusive and sustainable economic growth, again subject to a value-for-money assessment. There will also be £80 million of funding for the Port Talbot Transition Board to support the decarbonisation at Tata Steel.
The government launched a green paper on its modern industrial strategy earlier this month. It set out the eight growth-driving sectors: advanced manufacturing; creative industries; clean energy industries; defence; digital and technologies; financial services; life sciences; and professional and business services. In line with the strategy, the government has allocated; £975 million for the aerospace sector over five years to fund the development of the latest aerospace technology in the East Midlands, the South West and Scotland. They also announced over £2 billion in funding over five years to support the automotive sector, including the zero-emissions vehicle manufacturing sector and supply chain in the North East and West Midlands, and £520 million for life sciences manufacturing firms.
Of the £56.9 billion defence budget in 2024/25, around £25 billion will be spent on UK industry, supporting advanced manufacturing in aircraft, radars, submarines, and other key industrial capabilities.
The government has confirmed £125 million for Great British Energy, which will be headquartered in Aberdeen and is expected to increase GDP by 1.4% over the parliamentary term. The UK’s clean energy sector will receive £3.9 billion in funding in 2025/2026 for carbon capture utilisation and storage projects (previously announced), along with new contracts for the world’s first 11 green hydrogen projects across Scotland and Wales.
The government has also confirmed support for two electrolytic hydrogen projects in Scotland, in Cromarty and Whitelee, and two in Wales, in Milford Haven and Bridgend.
The budget introduced the first integrated settlements for the West Midlands and Greater Manchester from 2025/26, in line with the upcoming English Devolution White Paper. The integrated settlements are designed to deliver a single flexible pot of funding with a single outcomes framework to support combined authorities to deliver growth. The combined authorities eligible to receive integrated settlements from 2026/27 are the North East, South Yorkshire, West Yorkshire Mayoral Combined Authority and Liverpool City Region Combined Authority. The government is looking to reform the local growth funding landscape at Phase 2 of the spending review by “rationalising the number of funds”, and “moving away from competitions” to support local leaders to drive growth.
Challenges
While specific spending will be announced later in spring 2025, Rachel Reeves cautioned of a 2% “productivity, efficiency and savings target” for all departments to meet next year. She emphasised a need to use technology more effectively and the need to join up services across government, taking a “zero-based approach” so that taxpayers’ money is spent as effectively as possible.
Looking forward
Phase 2 of the spending review will be published next spring, which will provide a detailed longer-term outlook. The goverent will also publish a ten-year infrastructure strategy which will guide investment plans and aims to give the market greater certainty about project pipelines. The strategy will be published by the new National Infrastructure and Service Transformation Authority (NISTA). NISTA aims to set strategic infrastructure priorities and oversee the design, scope and delivery of projects going forward.