Rachel Reeves’ first budget

The first Labour Budget in 14 years was always going to be one-to-watch.  

Who wins and who loses from the fiscal choices Rachel Reeves and Keir Starmer made today will set the tone for the rest of this Parliament – and many political battles to come.  

MHP’s Public Affairs team has pulled together the top announcements, assessing the political and business impact from this significant fiscal event.

Political Strategy

• Framing: Reeves framed her fiscal statement as a “change budget”, delivering on the promise of responsible leadership in the national interest – the core tenet of Starmerism. She was clear that growth is the only way to achieve the rising living standards and investment in public services that Labour fundamentally aspires to. At the same time, Reeves continued to cast herself as a tough chancellor, facing up to fiscal reality, against the “dishonesty” of the previous government, as well as unspoken party pressures to spend more. 
• Political choices: The big political choice in this budget was the decision to raise taxes on business and the wealthy to pay for increased public spending. Reeves was at pain to avoid any sense of a return to austerity, while protecting “working people” still suffering from a rising cost of living -  despite Labour’s continued inability to define who it means by ‘working people’. The biggest winner in this budget was the NHS with £22.6bn budget boost.
• Timing: After the election Reeves decided to delay her budget to allow an opportunity to ensure an opportunity for both more ambitious decision making and rigorous oversight from the OBR. This came at a political cost, to a large degree paralysing government decision making. It also raised the political stakes to get this budget right.
• Communications: Controversially, Reeves choose to brief out a significant proportion of the content of her budget in advance. In doing so she sought to manage market, stakeholder and political expectations, but it earned her a slap down from the Deputy Speaker for breaking with convention and disrespecting parliament. 
• Public Finances: Reeves returned to a familiar theme, the £22 billion “black hole”, substantiating it with a "line by line" analysis and claiming OBR validation. The Chancellor argued that the previous government had not provide the OBR with the information needed for an accurate Spring forecast, and had failed to budget for many commitments, including the compensation schemes for the Post Office and Tainted Blood scandals. Through the budget, Reeves fixed the envelope for Phase 2 of the Spending Review, which will conclude in the late spring.

Fiscal rules

• New Fiscal rules: Reeves announced two new fiscal rules to guide her decision making:

1. The Stability Rule: to move the current budget into balance, so day-to-day spending is met by revenues, and the government will only borrow for investment. 

2. The Investment Rule: to reduce net financial debt (public sector net financial liabilities) as a proportion of GDP but including financial assets that are expected to generate future returns within calculations. 

• On target: Going forward the fiscal rules will target the third, not the fifth year of a rolling forecast period. Reeves confirmed that the Government was on track to meet both rules.
• Headroom: The change to the formulation of the investment rule, provided £100billion of headroom for new capital investment over 5 years.

Taxes

This was a significant tax raising budget, with overall tax take forecast to rise from 36% of GDP in 2023-24 to 38.3% in 2027-28:

• Personal taxation: There will be no increase to income tax and Employees National Insurance, meeting Labour’s manifesto commitment. The Chancellor also signalled that these tax thresholds would increase with inflation from 2028. 
• Corporation Tax: Corporation tax remains frozen at 25%, the lowest in the G7 with a commitment to maintaining this for the duration of this parliament.
• Employers National Insurance: Employer NICs will increase to 15% from April 2025, up 1.2 percentage points. In addition, the per employee threshold at which employers start to pay National Insurance will be reduced from £9,100 per year to £5,000 per year and, in future, linked to CPI. To shelter SMEs from the impact, the Employment Allowance will increase from £5,000 to £10,500 and the £100,000 threshold will be removed. This means 865,000 small business will pay no NICS at all.
• Capital Gains Tax: The lower rate of Capital Gains Tax (CGT) will increase from 10% to 18% and the higher rate from 20% to 24%. CGT rates for Business Asset Disposal Relief and Investors’ Relief will rise to 14% from 2025 and match the main lower rate of 18% from 6 April 2026. The Investors’ Relief lifetime limit will be reduced to £1 million for all qualifying disposals made on or after 30 October 2024, matching the lifetime limit for Business Asset Disposal Relief. The two CGT rates for carried interest will both increase to 32% from 6 April 2025.
• Inheritance tax: As part of a “balanced approach” the current inheritance tax thresholds will be frozen until April 2030 (two years longer than planned). But inheritance tax will be extended to unspent pensions pots and agricultural property reliefs will be restricted.
• Business rates: There will be permanently lower business rates multipliers for retail, hospitality and leisure (RHL) properties from 2026-27. The small business multiplier will be frozen and there will be 40% relief on bills for RHL properties, up to a £110,000 cash cap. A discussion paper has been published to stimulate dialogue about future reforms to business rates.
• Stamp Duty: From 31 October 2024 the Higher Rates for Additional Dwellings surcharge on Stamp Duty Land Tax will increase from 3% to 5%. This is intended to give first time buyers an advantage over those buying a second home. The increase will impact non-resident and corporate entity buyers.
• Non-Dom Status:  The non-domicile status will be completely replaced by a new residence-based regime from 6 April 2025. This includes ending the use of offshore trusts to shelter assets from Inheritance Tax and scrapping the planned 50% tax reduction for foreign income in the first year of the new regime.
• Private education: VAT of 20% will be introduced on private school fees from January 2025.  Private school business rates relief will also be ended from April 2025. 
• Air passenger duty: APD will be increased by £2 for economy short haul flights. Higher rates for private jets will increase by 50% and the government will consult on extending the higher rate to more private jets.
• Fuel duty: Remains frozen and the 5p cut has been retained.
• Health promotion taxes: The tobacco duty escalator has been renewed, increasing all tobacco duty rates by RPI+2% plus an above escalator increase to hand rolling tobacco. A new vaping duty at 22p/ml from October 2026. There will also be a one-off increase in tobacco duty to maintain the financial incentive to choose vaping over smoking. The Soft Drinks Industry Levy will increase with inflation.

Capital Investment

• Public sector net investment will average 2.6% of GDP over the Parliament, in contrast to the previous government’s plans to reduce this to 1.7% of GDP.  
• Headline investments:
  • Transport:  Funding was confirmed for the TransPennine Route Upgrade, the Oxford to Cambridge East West Rail, HS2 from Euston to Birmingham, and a 50% increase in funding for local roads (pothole) maintenance. There was no change to pre-announced major road infrastructure project cancellations. 
  • Housebuilding:  £500 million was allocated to the Affordable Homes Programme. £46million for new planning officers.
  • R&D Investment: £20.4 billion allocated in 2025-26.
  • Energy: Continuing funding for the development of Sizewell C and £125m funding to kickstart Great British Energy. 
  • Health: £1 billion in additional capital for the NHS to address critical maintenance, repairs, and upgrades across the estate, £1.5 billion for NHS beds and diagnostic and surgical capacity in England to help bring down waiting lists and support people back into work, £1 billion for technology to boost NHS productivity, and over £2 billion for health R&D to drive innovation and support the UK’s leading life sciences sector.
  • Education: £1.4 billion for the school rebuilding programme, representing an increase of £550 million on this year and supporting 100 projects next year
  • Project Gigabit and Shared Rural Network: £500m allocated for 2025-26. 
  • Carbon Capture, Usage and Storage: £8 billion of private investment leveraged for Carbon Capture, Usage and Storage infrastructure. 
  • Industrial Strategy:  £975 million for the aerospace sector over 5 years, more than £2 billion over 5 years to support the automotive sector, and up to £520 million for a new Life Sciences Innovative Manufacturing Fund. 

• Enhanced oversight: There will be a new National Infrastructure and Service Transformation Authority, combining the functions of the National Infrastructure Commission and the Infrastructure and Projects Authority, to drive more effective delivery of infrastructure across the country, and a new Office for Value for Money, to root out waste and inefficiency, and undertake value for money studies in high-risk areas of cross-departmental spending. 

Public Spending

• The devil is always in the detail for departmental spending. There will be real time cuts for the Home Office, Cabinet Office, Transport, DCMS and DEFRA. There will also be a 2% Cross Government Productivity, Efficiency and Savings target implemented, increasing pressure on day-to-day spending.  
• Notable winners from today's Budget include:
  • Health: £22.6 billion for NHS day to day expenditure, to deliver an extra 40,000 elective appointments per week. £1.5 billion capital funding for new surgical hubs, diagnostic scanners and new beds across the NHS estate to create more treatment space in emergency departments, reduce waiting times and help shift more care into the community. 
  • Education: Investment in schools to rise by £6.7bn, a 19 per cent real-terms increase. £1.4 billion for the school rebuilding programme, including an increase of £550 million this year. The government is delivering on its other first steps, including supporting recruitment of 6,500 new teachers in England through a £2.3 billion increase to the core schools budget. 
  • Defence: £2.9 billion in additional total funding to the MoD, growing the defence budget by 2.3% per year on average in real terms compared to 2023-24. 
  • Justice: £1.2 billion to deliver extra prison places. 
• Council budgets:  £1.3 billion grant funding. Integrated settlements for West Midlands and Greater Manchester.

Economic Outlook

Projected Inflation (CPI):   

Inflation for 2024 has been forecast up from 2.2% in March, rising to 2.6% next year. 

2024: 2.5% | 2025: 2.6% | 2026: 2.3% | 2027: 2.1% | 2028 2.1% | 2029, 2.0%  

Economic Growth (GDP):  

Economic Growth was forecast slightly up for 2024, but down for 2026-28.  

2024: 1.15% |   2025: 2.0% | 2026: 1.8% | 2027: 1.5% | 2028: 1.5% | 2029: 1.6%  

Living Standards: 

Real disposable income per person, is forecast to fall by 1.25% compared to March forecasts, as employers are likely to seek to offset new costs by keeping wages down. 

The Labour View
Josh Kaile, Associate Director and Former Labour Policy Adviser

The first Labour Budget in 14 years and the first by a female Chancellor was much anticipated (and trailed) but was anything but boring.

Moving on from weeks of ‘painful’ trails by Ministers and advisors, the Chancellor was keen to highlight optimism for the future.

But Reeves had to set out the political reality that she faced, whomever was Chancellor today would have had to raise taxes, whether they liked it or not. They may not have spelt out quite as much as £40bn however, which is a record for modern times, more than Norman Lamont’s tax rises in 1992.

It was a surprise that those tax rises didn’t include an end to the fuel duty freeze, with the Chancellor retaining the freeze for another year at a cost of £2bn. The considerable part of tax rises instead comes from employers NI contributions increasing by 1.2% which is set to raise £25bn a year.

The past week has seen headlines criticise Labour for an attack on workers, but the Government will hope headlines will now focus on a significant rise of 6.7% in the National Living Wage to £12.21 for those aged 21 and over. An increase worth up to £1,400 a year for full time workers, and something Morgan McSweeney will no doubt ensure is plastered across election leaflets in upcoming local elections next year and in Labour’s attempt to regain power in Scotland.

This budget was of course an economic reorganisation from a new Government, but we also saw a much sharper political focus than we have witnessed in these first few months. A budget aimed at delivering growth to the economy that benefits workers and families across all parts of the UK. 

The question is whether the detail matches their refined political ambition.

The Conservative View
Mario Creatura, Director and Former Conservative SpAd.

Higher wages. Higher taxes. Higher borrowing. This Budget creates a major headache for business, and is not something they or their employees will likely forget anytime soon. 

Conservatives have been quick to characterise this Budget as an assault on capital, a £25 billion tax rise for employers, with farmers and family firms targeted. Public sector expansion running unchecked, with education taxed for the first time ever. The OBR forecasts at best anaemic growth, so how on earth can this fiscal approach lead to greater prosperity for the UK?

But perhaps worse than the immediate attack on Labour is the early and consistent hit they have taken on their credibility. For years they lambasted the Conservatives for dodgy dealings, broken pledges and corrupt motives. They proudly boasted that they would be different: painting themselves as honourable and honest. The recent litany of unforced errors, accusations of ‘fiddling the figures’ and deliberately deceiving the electorate mean they have become tainted as anything but.

In the election Labour said that "Growth is the way to pay for better public services". On Monday Starmer said “We need to pay higher taxes to avoid austerity". That is a completely different political framing. Labour can hardly blame business, and voters, for believing they were misled. You can see that in Starmer’s personal poll rating: this week it has collapsed a record 49-points, the fastest drop ever for any new Prime Minister.

And all this with an Opposition at nowhere near full strength. On Saturday, the Conservatives will have a new Leader. If the first four months are anything to go by, Labour will continue to give them a lot to work with.

If you would like to get in touch with the team, please contact Head of Public Affairs, Tim Snowball, at tim.snowball@mhpgroup.com