The Road Ahead What business can expect from the upcoming Budget

There’s still this year’s fiscal hole to fill and a likely sizeable hole in future years too.  Spending cuts for 2024-25 were previously announced in the August Public Spending Audit, following identification of a £22 billion spending deficit of which the most noteworthy were:

• £1.4 billion saved from targeting Winter fuel payments to those on pension credit and other means-tested benefits
• £0.8 billion saved from cancelling the Rwanda migration partnership
• £0.6 billion saved from stopping non-essential departmental spending on consultancies

There’s considerable debate over the actual size of the hole to fill – the latest speculation is that the Chancellor is seeking £40 billion of tax increases and spending cuts. Looking beneath this, this seems to comprise £20 billion of tax increases, but the remaining looks to refer to budgets being reduced in some departments to pay for protection of other budgets. What we’re unlikely to see is a cut in overall public expenditure of equivalent size to the additional amount raised through tax. The final size of the deficit will depend on the forecast update from the OBR (who will also soon be publishing the outcome of their review into the information they received from the Treasury when forming their March forecasts).

Most worrying for businesses are the tax rises on the table. Having ruled out the majority of the tax base through manifesto commitments, the remaining taxes are some of the most challenging to square with a broader growth pitch, as well as not being the easiest to raise revenue from.

Discussion of Capital Gains Tax (CGT) has featured prominently in the media and sits uneasily alongside an urgent need to stimulate investment. It’s a fairly difficult base from which to squeeze additional revenue from however: only 369,000 were liable for the tax in 2023-23, and a large proportion (41%) of the tax was paid by less than 1% of those taxpayers, with the tax particularly susceptible to behavioural effects. Changes to Business Asset Disposal Relief are also a worry for business – claimed by 44,000 in 2022-23.

Helpfully, HMRC publish a document which quantifies the direct effects of illustrative tax changes on revenue. This demonstrates the limited scope for large increases to CGT, with 10% point increases in either the lower or higher CGT rates found to reduce tax revenue. The latest is that the Chancellor plans to raise CGT on sales of shares by a few % points, which would raise some revenue, even allowing for behavioural effects. For Business Asset Disposal Relief, there is also an indication that increases could raise additional revenue – lending credence to concerns raised by, among others, Family Business UK that this may be targeted as a revenue source.

Other planned tax changes, particularly pertaining to the taxation of private equity and non-UK domiciled individuals, seem likely to be adjusted relative to previous plans, as – like with CGT – there is a significant risk that behavioural responses actually serve to widen the deficit. Recent analysis for Foreign Investors for Britain by Oxford Economics adds helpfully to the evidence base here.

Employer NI is on the table as well, with rumours swirling over an increase in overall employer NI and NI on pension contributions. This is a particularly poor tax for employers, paid regardless of whether profit is made. Previous research by NIESR and the OBR calculates that the effective impact of this tax is to lower wage rises for workers further out. The OBR has previously estimated that 20% of the cost of higher employer NI is absorbed via lower profits in the first year, before it is passed on in higher prices and lower wages in subsequent years. As the cost and risk of employment also stands to be increased by forthcoming changes to workers’ rights, taken together, this would represent a big hit to job creation at a time when the labour market is already weakening.

Ultimately, the tax choices for the Chancellor seem to boil down to taxing employment or taxing investment. Given the government’s rhetoric on investment to-date – most recently from the Investment Summit and the Industrial Strategy green paper – they seem more likely to raise the relative burden on employment.

On the 10^th October, we saw the much-anticipated publication of the Employment Rights Bill, containing 28 of the 75 policy measures where the government intends to strengthen employment protections for workers. You can read our response here

The most important takeaway is that there are no immediate implications for business. But there are some areas which will come into law relatively soon (i.e. once the Bill is enacted):

• Upgrade to flexible working rights
• Day one rights to parental and bereavement leave
• Strengthened protections for pregnant women and new mothers

Other areas will be consulted on and are likely to take effect from 2026, including:

• Day one protection from unfair dismissal including right to a tribunal (the characteristics of a protected probationary period of approx. 9 months will be consulted on)
• Day one rights to sick pay (consultation on replacement rate for those earning below the current flat rate of Statutory Sick Pay (SSP)
• Additional rights for those on zero hours contracts (further consultation on application to agency workers and the offer of guaranteed hours)

We have welcomed the nature and extent of the consultation process so far and look forward to engaging further. And we also welcome recognition from the government that protection for probationary periods will help manage some of the risks for business. But there’s no getting away from the fact that this is a big package of measures.

You can read further details here,

Fiscal rules have also been a hot topic. We advocated in our Budget submission for an update to the rules to once again accommodate borrowing for investment – and rumours suggest that the Chancellor will be making such a change. There are a few options on the table to enable this: changing the UK’s net debt definition to include a broader range of less liquid assets and liabilities could lower the recorded debt level and unlock in excess of £50 billion of borrowing. But there’s a limit: previous Treasury analysis has found that each additional £25 billion of borrowing could push up interest rates by 0.5-1.25% points. And debt interest payments are fairly high by historical standards – albeit below recent peaks. Nonetheless, better recognition of the UK’s assets and liabilities will more effectively capture the public finance payoffs from public sector investment.

Getting the balance right between this year’s fiscal hole and building a more sustainable economy is undeniably tricky. It seems likely that at least some of the current hole will need to be replenished through borrowing. And then there’ll be borrowing to invest. Differentiating between good borrowing, which drives up growth, and bad borrowing, which reflects the fiscal inheritance, will require a deft touch. We expect that, alongside updated fiscal rules, the government will set out its principles for managing the public finances, a framework for setting departmental spending which has a firmer timetable, and an enhanced role for the OBR, to enable markets, businesses and consumers to digest and contextualise the decisions.

This Budget will also see further details of how the government intends to drive growth using the other levers under its command. There’ll be a one-year Spending Review for 2025-26, as well as the spending envelope set for 2026-27. Spring 2025 will then see a multi-year Spending Review. We’re already starting to get further information on the government’s near-term priorities for spending, with details of the Industrial Strategy likely to be published around the Investment Summit on 14^th  October.

Lost amidst the noise around the Employment bill were some welcome announcements by the Chief Secretary to the Treasury.  The key takeaways were:

• Strengthened oversight of the delivery of infrastructure plans through creation of NISTA (combining the National Infrastructure Commission (NIC) and the Infrastructure and Projects Authority (IPA)
• Delivery of 10 year infrastructure plan alongside the Spring Spending Review
• Recognition that infrastructure is a key growth engine
• Reference to the role of strategic clarity in infrastructure delivery, referencing NIC’s report into the cost drivers of major infrastructure projects in the UK
• Reference to the Planning and Infrastructure Bill which will soon be introduced to accelerate the delivery of infrastructure

These announcements were not new, but they provide a little more detail on how the government will be following through on these commitments.

The Industrial Strategy Green paper published at the Investment Summit gives a lot of detail on the government’s thinking on policy levers and growth, even though at this point it covers absolutely everything. The 8 sectors from which industrial strategy choices will be made represent nearly a third of the economy, cross-cutting enablers (like skills, regulation and trade) are in scope and there are multiple overlapping objectives, strategic priorities, and weaknesses to address, with 35 consultation questions to respond to. The hard work will be to target policy and make choices, and it’ll be key to build in the takeaways from the NIC’s recent work.

Our members have made their priorities for government clear in many of our Policy Voice surveys. A consistent theme is the desire for stability in policy-making: in July, 53% of members said that it was their top blocker to growth and investment. The desire for an industrial strategy is strong too, backed by 88% of our members when surveyed in May 2023, with innovation and R&D, skills and vocational education, and infrastructure the top priorities. In a further question on industrial strategy priorities this July, members re-iterated the need for it to deliver stability and foster growth, underpinned by long-term funding commitments. Meanwhile, there is a strong message from members that the ongoing uncertainty arising from speculation over future tax changes on business continues to influence their investment, employment and location decisions. There’s a strong desire for the forthcoming Corporate Tax roadmap to deliver confidence, clarity and stability for business.

To say there’s a lot on the government’s agenda is to put it mildly. We look forward to continuing to work with the new government, helping to shape the policy environment to best meet the needs of our members and drive growth and prosperity in the years to come.