From the Desk of the Chief Economist  Autumn Budget preview

The IoD have been asked by government about our Budget submission contents since July… The number of tax ideas being tested in the media has been significant and unprecedented, as was the Chancellor’s “scene-setter” speech on 4 November. Nonetheless, we all felt we were getting a sense of how the Budget was shaping up. The OBR was going to refresh its productivity and growth forecasts, causing the fiscal rules to no longer be met, requiring around £30 billion extra to be found. The government was giving clear signals that it was prepared to break its manifesto commitment not to put up income tax. And while this wasn’t exactly good news, it eased pressure on the business and investor community. That all changed on 14 November as under the unconvincing guise of good news from the OBR, the Treasury communicated that it no longer “needed” to raise income tax rates. This has left the Budget policy selection looking like a very growth-unfriendly mix of tax increases on business and investment, with stealth tax increases on households and some giveaways to sweeten the deal for voters.

Key Budget policies on the table

What to takeaway from the above? One key point to note is that with the estimated fiscal hole to fill at £30 billion, more will need to be raised. A second point is that roughly two thirds of the tax revenues above are raised from business – a little different to the Chancellor’s promise last year not to raise business taxes again. Thirdly, it’s a lot of measures – very much the smorgasbord approach to revenue-raising which every economist worth their salt agrees the Chancellor could do but shouldn’t.

What the IoD has been asking for

Our Budget submission went into the Treasury on 15 October, and here were our key asks on behalf of business leaders:

1. Deliver fiscal stability – maintain the frequency with which the OBR reports on the economy and public finances, and increase headroom against the fiscal rules
2. Create a 10 year strategy for benefit reform, with KPIs for bringing down benefit spend
3. Lean on income tax when significant revenue needs raising as it incurs a less negative growth penalty relative to the alternatives
4. Enhance and expand the corporate tax roadmap into a genuine business tax roadmap which targets a lower tax burden
5. Publish impact assessments for different parts of the business community following each Budget
6. Direct Apprenticeship levy funds towards apprenticeships and other training
7. Make sensible changes to the Employment Rights Bill, including unfair dismissal at nine months of employment rather than day one and maintaining existing thresholds for trade union recognition and industrial action

The message we’ve been delivering into government consistently is the need for policy stability, particularly on business tax. And then noting that the second biggest concern amongst businesses – relevant especially when the government is targeting a lower regulatory burden – is labour market regulation.

How will the Budget re-shape the growth outlook?

This Budget is set to raise taxes across the economy by around £30 billion or 1% of GDP. There is uncertainty over the growth impact because we don’t currently know in what years, in what areas and at what scale the policies will ultimately fall. But this is similar in scale to fiscal tightening during 2010-2016 and 1994-2000. However, underlying economic conditions are far weaker than during those periods: growth averaged 2.0% over 2010-2016 and 3.4% over 1994-2000 against around 1% now. But unlike during the 2010-2016 period, we have scope to cut interest rates to cushion demand – rates could fall to close to 3% during 2026, following an expected rate cut on the 18^th December.

The composition of this Budget and its impact on confidence will be crucial. Will it convince businesses and investors that this is genuinely the end of tax rises? How will consumers respond to stealth and overt increases in their taxes when set against some sweeteners? Will the Chancellor convince the OBR to positively score some of her policies as growth-improving? This will matter for consumer spending, investment and hiring trends in the coming months, with the potential to amplify or ameliorate tax changes. Currently the IoD’s business confidence measure remains at rock bottom, with businesses highlighting cost pressures from tax rises and the minimum wage, weak demand with discretionary spend on hold and heightened policy uncertainty suppressing investment and hiring. This Budget needs to reset the relationship with business in order to drive the UK out of its growth funk.

We may see more measures from the Chancellor to improve growth further out. She was able to convince the OBR that planning reform would enhance growth before, and with the government recently tabling amendments to the Planning Reform Bill, she may yet convince them of a stronger boost to growth – and consequently tax revenues. But a mix of tax measures targeting businesses risks choking investment further, weakening productivity further out. The response of bond markets will be crucial: an unfavourable reaction would see government borrowing costs rise further, with repercussions for mortgage costs, which are priced off related financial instruments.

But the biggest risk from this Budget may be that it simply reinforces a feeling of managed decline, leaving us all a bit poorer, but failing to lift growth prospects.

Keep sharing your views

The IoD is regularly meeting with government on your behalf during these uncertain times, feeding in your perspectives across a range of areas. From Employment Rights, to ongoing changes to reporting requirements at Companies House, to the practical applications of the government’s Industrial Strategy priorities, we are meeting with ministers and officials regularly to negotiate better outcomes for businesses. We are regularly told how valuable the data we bring to those meetings is in representing the views of business leaders directly to policy makers, and giving real-world insights into policy impact.

• Our monthly Policy Voice survey is live and seeking views on the Employment Rights Bill (particularly trade union access rights, Companies House filing requirements and regulatory compliance) – closes on 26 November ahead of the Chancellor’s Budget speech.
• Budget snap poll: we’ll be running a poll with IoD members directly after the Chancellor’s speech, which will finish around 1.30pm on 26 November. It will be open for 24 hours – please share your reaction to the Budget and the specific policy measures as we’ll be sharing with the Treasury and the media.