Six things to look out for in the autumn budget 2024

1. Will the government be able to show progress on its growth mission?

Alongside the budget, Rachel Reeves will present the latest economic forecast from the independent Office for Budget Responsibility (OBR). The judgments the OBR makes will be consequential for this budget: any improvement in the outlook will increase forecast tax revenues and give the chancellor more room for manoeuvre against her fiscal rules – and allow her to claim progress on the government’s mission to boost growth. Any deterioration, of course, will do the opposite. 

There is little reason to expect a big change in underlying growth prospects since the OBR’s last forecast, in March. Other independent forecasters, including the Bank of England, have upgraded their forecasts for the next few years – but only slightly, and back in the spring the OBR was among the more optimistic forecasters. 

Other changes to the forecast are more likely. For example, some are now expecting inflation to dissipate more quickly, while market expectations imply interest rates will remain slightly higher for longer. But again the fiscal consequences of these will probably be small.

Most interesting will be what effect the OBR thinks any new policies will have on growth. The budget will be the first opportunity for this government to announce measures that will help achieve its growth mission: what will the OBR make of these? And how will any new tax rises (see below) weigh against efforts to boost growth elsewhere?  

The OBR has shifted its approach in recent years, taking greater account of the possible effects of government policies on the supply side of the economy. It has already published a paper ¹⁴ https://obr.uk/docs/dlm_uploads/Public-investment-and-potential-output_August-2024.pdf  indicating how it might judge that increases in public investment would affect the UK’s economic supply potential, which pre-budget briefing suggests the government is likely to announce. 

But which policies will the OBR decide are large enough, and based on strong enough evidence, to change the overall growth projections? And how will the effect of these policies compare to recent policy-induced growth upgrades during Jeremy Hunt’s period as chancellor?

2. How much better off will households be by the next election?

The OBR’s March forecast painted a relatively gloomy picture for household incomes. Adjusted for inflation, household disposable income was only expected to return to pre-pandemic levels in 2025/26, and only grow slowly beyond that. There were two main reasons for this: sluggish real wage growth and further tax increases planned for the next few years, the largest of which is the freeze to the personal allowance and other income tax thresholds.

Those same factors will determine how quickly household incomes are forecast to increase this time. Will inflation falling faster than previously forecast mean a short-term boost to real incomes? And what effect will any new tax measures have, including any decisions over whether to retain, cancel or extend the income tax threshold freezes that Labour had described in opposition as a stealth tax on working people? ¹⁶ https://news.sky.com/story/freezing-income-tax-thresholds-wouldnt-break-labour-manifesto-pledge-13236332  If pre-budget briefing is to be believed, the overall tax increase could be substantial: this would unavoidably dent overall household incomes.

As well as the path of overall household incomes, the government is likely to focus on the effect of any tax policies on people at different income levels. The taxes announced in its manifesto – on non-doms, ‘carried interest’ and private school fees – would all primarily affect people towards the top of the income distribution. If it announces other large tax increases, or changes to Universal Credit or other elements of the welfare system, how will these affect those at different income levels?

3. What changes will Rachel Reeves make to the fiscal rules and framework?

There has been a lot of speculation since the election about how Rachel Reeves might change the fiscal rules. There are lots of problems with the rules she inherited from Jeremy Hunt and a good case for a change of approach. And the Labour manifesto emphasised in particular the importance of striking a “balance between prioritising investment and the urgent need to rebuild our public finances”.

One rule change we know for sure is coming. As chancellor, Hunt committed to keep borrowing (the annual gap between tax revenues and total government spending) below 3% of GDP in five years’ time. Labour’s manifesto committed to replacing this rule with a new rule requiring that “the current budget [the gap between day-to-day spending and government revenues, mainly from tax] moves into balance” to get away from what it described as the previous rule’s “incentive to cut investment”. On its own, this rule change would impose a tighter constraint on day-to-day spending but would not constrain borrowing for investment.

But the rule that currently constrains investment spending is the debt, rather than borrowing, rule. Reeves indicated on a visit to Washington on Thursday that she will target a different measure of debt to the one used by Hunt that incorporates a wider set of government assets to give more scope to borrow for investment. Back in March, Hunt had just £8.9bn of headroom against his target for public sector net debt (excluding the Bank of England’s balance sheet) to fall between the fourth and fifth years of the forecast. If he had instead used a broader measure of public assets and liabilities, such as public sector net financial liabilities, his headroom would have been £62.0bn. 

Watch our budget briefing on fiscal rules

There are potentially good arguments for targeting a different measure of debt – but also arguments against possible alternatives. The UK has unusually high turnover of fiscal rules compared to other countries. Some of the details of the current rules encourage or enable poor policy making and should be improved: for example, targeting debt falling between the last two years of the forecast horizon allowed the previous government to repeatedly give money away in the short term while promising to implement (often implausible) spending cuts or tax rises later. 

But whether Reeves can change the debt target without undermining public or investor confidence in this government’s commitment to sustainable fiscal policy is likely to depend less on the precise details of the rule chosen and more on how she approaches her first major set of fiscal announcements more broadly. 

As we have argued, it is important that the government sets out its higher-level fiscal objectives and how those fit with and are traded off against other government objectives. Outsiders will also be reassured if Reeves’s approach to tax and spending policy suggests that she is taking seriously the spirit – and not just the letter – of the rules: does she leave more headroom against the targets to allow for uncertainty in forecasting? Does she appear to ‘game’ any of her rules, such as by carefully timing when measures take effect or precisely how they are structured to affect whether they count against her rules? What safeguards does she put in place to ensure that any extra public investment achieves value for money?

4. How large a tax rise will Rachel Reeves implement?

The Labour manifesto committed to a modest set of tax rises: VAT on private school fees and reforms to the treatment of non-doms and carried interest, raising £2bn per year, and an unspecified crackdown on tax avoidance raising a further £5bn. However, briefing ahead of the budget suggests the chancellor is looking to raise much more, possibly running into the tens of billions of pounds per year. 

A large net tax rise following an election would not be unusual. In every fiscal event following an election since 1992, the chancellor has increased taxes. It would not be a surprise if Reeves’ tax rise exceeded both Gordon Brown’s and George Osborne’s first budgets (£14bn and £13bn, respectively, in today’s terms). But might she even top the biggest tax-raising budget in half a century – from Norman Lamont in 1993 (£33bn in today’s terms)? 

Watch our budget briefing on tax rises

Beyond the total amount raised, what specific tax measures will Reeves adopt? Will there be clear evidence of a coherent strategy for the whole tax system, which our research shows will be important for any chancellor looking to reform and improve the tax system? Or will this budget resemble some of her predecessors’, with a random assortment of small revenue raisers deemed politically feasible? And will she also announce some surprise tax cuts alongside larger tax rises?

Chancellors often make their biggest adjustments to the tax system in the year following elections. So this budget looks set to be one of the most important pieces of tax policy for the rest of the decade.

5. Does the government have a realistic plan for funding public services?

Labour has, not unfairly, spent much of its first five months in office highlighting the dreadful state of public services that it has inherited. The budget is the first real opportunity for it to show that it can escape the cycle of short-term policy making that has played a large part in creating this mess. 

Since 2015, governments have consistently set unrealistic budgets only to then pump in billions of pounds of (highly inefficient) emergency funding in response to crises. Current plans – inherited from the Sunak government, plus manifesto commitments – imply huge cuts to day-to-day spending outside protected areas like health, schools, aid and defence. Our analysis suggests this would mean budgets that fell well short of meeting growth in demand over this parliament, especially in criminal justice. 

But these numbers are based on assumptions. The budget, which will set firm spending plans for next financial year, is the first time the government will be forced to choose between services that are all crying out for more funding. Money talks – and there is no better indication of what a government wants to prioritise than departmental spending allocations. 

Rumours are already emerging around where it will direct money. It has always been assumed that the NHS will receive the largest settlement of any service, roughly 3.6% per year, to allow it to meet its 2023 workforce plan. But there are reports that it could be as high as 4% in 2025/26. ¹⁸ https://www.theguardian.com/society/2024/oct/18/nhs-set-to-receive-4-budget-rise-but-health-chiefs-say-it-may-not-be-enough   

That’s bad news for other services. The criminal justice system and local government will be particularly concerned, as high demand and financial fragility respectively mean that low settlements will make it incredibly hard to improve performance. 

Part of the solution will be a programme of public service reform. Government critically needs to improve the productivity of services and reduce future demand for acute services. That will require improved capital investment and making public services more preventative. The mood music on both from the government has been promising, but the budget will show how they plan to deliver this. 

Watch our budget briefing on public services

6. How much will the government increase investment?

The government has made a big play of the importance of investment to achieve its missions – from using public investment to improve the country’s infrastructure and ‘crowd in’ private investment to boost economic growth ²² https://www.gov.uk/government/publications/national-wealth-fund-mobilising-private-investment  to funding the green infrastructure and technologies needed to achieve net zero ²³ https://labour.org.uk/wp-content/uploads/2024/03/Make-Britain-a-Clean-Energy-Superpower.pdf  and tackling the health service’s crumbling estate and poor IT. ²⁴ https://www.gov.uk/government/publications/independent-investigation-of-the-nhs-in-england   

But it inherited plans from the Conservative government that imply departmental capital spending barely increasing in cash terms for the remainder of the parliament, and so falling sharply relative to prices and the size of the economy. If the government stuck to the plans it inherited from its predecessor, public sector net investment would fall from 2.4% of GDP this year to 1.7% by 2028/29. 
One crucial decision for Reeves in her first budget, then, will be how much more she wants to spend on investment. The Labour manifesto committed to an additional £5bn of investment per year as part of a Green Prosperity Plan. Keeping public sector net investment constant as a share of GDP would require an additional £15bn a year – on top of those manifesto plans – by the end of the parliament.

There is a clear need for more investment in many areas, as our work has highlighted for example in hospitals and prisons and to achieve clean power. But the government cannot take for granted that extra money will be spent well and achieve the results they want. So it will also need to put in place better processes to support good decision making and delivery of capital projects. 

The chief secretary to the Treasury, Darren Jones, has already announced that a new National Infrastructure and Service Transformation Authority (NISTA) will “fix the foundations of our infrastructure system”. Will the budget shed any more light on how this will work – and provide further reassurance that public investment will be better managed in future than it has been in the past?