Director Weekly Rachel Reeves’s long-awaited Budget failed to lift the UK’s growth prospects
After weeks of confused messaging and policy U-turns, this week’s Budget was a missed opportunity to improve the outlook for growth. For many employers, the most significant policy development of the week emerged a day later, when the government climbed down on its plans for ‘day one’ employment rights.
Business leaders’ verdict on the Budget was scathing, as our snap poll revealed. Eighty per cent feel negative – even more than the 67% who felt negative after the 2024 Budget.
As the dust settles, here’s five take-aways.
1. The much-vaunted fiscal black hole was a mirage
The most surprising aspect of the Budget was the total absence of the expected ‘fiscal hole.’ There was no hole whatsoever. The Chancellor could have met her fiscal rules without doing anything.
Yet she opted for £26bn of tax increases. Most of this will be used to double the fiscal headroom, which we welcome. But the rest fuels higher public spending.
2. Tax rises will be a drag on growth…
The approach to raising those taxes will hit growth harder than might have been the case. Having decided against increasing the income tax rate – the least-damaging option for growth – this will weigh heavily on the economy.
At least the burden has been shared with households this year; businesses were not the only targets.
3. …but not yet
Most of the tax-raising measures are back-loaded into the later years of the forecast – that is, from 2028-29 onward. Policy measures actually add £9bn into the economy in 2026/27, and £7bn in 2027/28.
That will weaken the case for interest rate cuts over coming months. I also wonder if the most politically-sensitive measures, like the mansion tax, will ever be implemented. As an election nears, don’t be surprised if it’s scrapped.
4. The cost of employment has risen again – but employment law reform is welcome
The Budget added – again – to the cost of employing people. The £2,000 cap on salary sacrifice into workplace pensions was the most unpopular measure in our snap poll – viewed negatively by 78% of respondents. The National Living and Minimum Wage increases will hit some employers hard, too (viewed negatively by 58%).
However, Thursday’s announcement that the government will drop plans for ‘day one’ employment rights was great news.
This has been business’s single biggest concern about the Employment Rights Bill, so while other concerns remain, this is significant progress, and will increase confidence in hiring.
5. A missed opportunity on growth
There were a handful of other welcome announcements. We welcomed funding for the Youth Guarantee and the full funding of SME apprenticeships for under-25s, and the decision not to converge the two rates of Landfill Tax, which will be a relief to the construction sector.
Overall, however – as the OBR judged – there is nothing in this Budget that materially improves the outlook for growth.
The ‘smorgasbord’ approach to raising taxes is complex, inefficient and damaging to growth, while the confused political handling has been destabilising and unnecessarily eroded confidence yet further.
In some regards, the government opted to tread water with this weeks’ Budget. The Chancellor will point to stability in the cost of borrowing as a sign of success. Yet the truth is that this was a collection of policy choices that failed to improve the outlook for growth.
Read more about how directors have reacted to the Budget in our snap poll results here.
About the author
Anna Leach is a well-known UK economist, who appears regularly in the broadcast and business media. She has over 20 years of experience in a variety of macroeconomic and policy roles in business organisations and the civil service.
Prior to joining the IoD in 2024, Anna was Deputy Chief Economist at the Confederation of British Industry (CBI), where she was responsible for macroeconomic analysis, business surveys (economic, policy and commercial) and economic consulting.
Earlier in her career, Anna was a member of the Government Economic Service, where she undertook policy roles at the Department for Work and Pensions, looking at labour market issues, and in the HM Treasury economic analysis team. Anna has an MSc and a BSc from the University of Warwick, both in Economics.
Director Magazine
This article is published as part of IoD Director, the authoritative voice of UK business leadership.
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