Autumn Budget delivers short-term living standards pain in the hope of long-term growth-based gains 31 October 2024 The first Labour Budget in nearly 15 years marked a decisive shift from the planned cuts set out by the last Government, with better-funded public services and greater public investment coming from higher taxes and more borrowing. But the Budget has not yet delivered a decisive shift away from Britain’s record as a ‘stagnation nation’, with the outlook for growth and living standards remaining weak in this Parliament, according to the Resolution Foundation’s overnight analysis of Autumn Budget 2024. Key findings from the report More, more, more: putting the Autumn Budget 2024 decisions on tax, spending and borrowing into context include: Britain’s National Health State. Health alone accounts for 40 per cent of the overall £35 billion real increase to day-to-day public service spending between 2023-24 and 2025-26. As a result, the 2025-26 health budget will account for 42 per cent of all departmental spending, up from 31 per cent in 2007-08. A tight Spending Review. The decision to frontload public service spending increases into this year and next have created a tough climate for the Spending Review next Spring. Setting a spending envelope that increases by just 1.3 per cent a year in day-to-day spending on public services between 2025-26 and 2029-30 implies £10.8 billion of real per person cuts to unprotected departments, sending their funding back to 2015-16 levels. No margin for error. Having chosen a new debt rule that gives her more headroom, the Chancellor has already used it up, with just £9.9 billion to spare against the current balance rule, and £16 billion against the Public Sector Net Financial Liabilities rule. Even a modest economic downturn could force the Chancellor to come back for more tax rises at a future fiscal event. Tax and benefit changes fall on everyone’s shoulders. The combined impact of benefit cuts, employer National Insurance rises and consumption tax changes are felt evenly across the income distribution. The poorest half of households face a 0.8 per cent reduction in their annual income on average, while the richest half face a 0.6 per cent decrease. However, increases to Capital Gains and Inheritance taxes (not included in this modelling) are more progressive, so wealthy households will face the largest cash impact overall. A prolonged pay downturn. The combination of higher inflation and weaker growth stemming from increased taxes on employment, coming on top of an already challenging outlook, mean that real pay is set to stagnate again in the middle of this Parliament. As a result, by 2028 real wages are expected to have grown by just £13 a week over the past two decades. A (public) investment nation…The welcome boost to public investment, preventing the planned cuts set out by the previous Government, means that Public Sector Net Investment is set to average 2.6 per cent of GDP over the forecast period. This would be the highest five-year average in the UK since 1980-81, and bring the country close to the OECD average. …or a stagnation nation? Real household disposable income per person is projected to grow by 0.5 per cent a year on average across the Parliament. While stronger than growth during the last Parliament (0.3 per cent), it would still be the worst term for living standards under a Labour government, lower even than the 0.8 per cent annual growth recorded in the 2005-2010 Parliament. Mike Brewer, Interim Chief Executive of the Resolution Foundation, said: “Rachel Reeves’s first ever Budget was never going to be a crowd-pleaser, given the profound and often conflicting challenges she faced, from failing public services to perilous public finances, weak growth and stagnating living standards. “By prioritising extra spending on public services and investment, the Chancellor is borrowing an extra £32 billion a year by the end of the Parliament, with another £41 billion coming from tax rises too. “The short-term effect of these changes will be better funded public services – not just across schools and the NHS – but, critically, also in our justice system. But families are also set for a further squeeze on living standards as the rise in employer National Insurance dampens wage growth. “With Britain finally turning the page on its longstanding failure to invest thanks to a £100 billion boost to public capital spending, the hope is that this short-term pain will eventually turn into a long-term living standards gain. But if it doesn’t, future Budgets won’t be any easier to deliver, especially if further tax rises are needed.”
