The first Labour Budget in nearly 15 years marked a critical economic and political turning point. This was the chancellor’s moment to address a challenging fiscal inheritance, striking a balance between establishing fiscal credibility and delivering the necessary firepower to repair public services, avoid a return to austerity and ignite investment-led growth.
The outcome: a “go big” Budget that will boost public spending by more than 2 per cent of GDP – equivalent to £70 billion annually for the next five years – half funded through major tax hikes and half by new borrowing. This Budget was simultaneously one of the largest tax-raising fiscal events in recent decades and one of the largest fiscal loosenings. The size of the British state will be permanently higher as a result, remaining above 44 per cent of GDP for the rest of this decade (which is almost 5 percentage points higher than before the pandemic).
A New Fiscal Framework
The chancellor’s choices were guided by two new fiscal rules. First the stability rule, which requires day-to-day spending to be fully funded by tax revenues by the end of the decade, echoing Gordon Brown’s “golden rule”. This is the binding constraint on the government’s fiscal plans and necessitated more than £40 billion in tax rises, enough to push the overall tax take to a record high of 38.2 per cent of GDP by the end of this parliament.
Second is the investment rule. This requires a new debt measure called net financial liabilities to fall as a share of GDP by the end of the decade. As we suggested recently, switching to this new measure is necessary to unlock tens of billions of pounds of extra borrowing to fund investment-led growth. In the event, the chancellor opted to spend about £20 billion extra per year; this is enough to keep public-sector net investment stable at around 2.5 per cent of GDP for the rest of the parliament, rather than declining as the previous government had planned.
Tackling a Difficult Economic Inheritance
The government entered this Budget facing multiple spending pressures: a £22 billion near-term budget overrun; £13.6 billion in one-off payouts for the infected-blood and Post Office scandals; and a pressing need to boost departmental budgets to avoid a return to austerity planned by the previous government. To cover these shortfalls and help restore public services, the chancellor increased day-to-day departmental spending significantly: it will be almost £50 billion higher in 2029–30. To offset some of these costs, measures to cut the welfare bill were also announced, including efforts to reduce benefit fraud and error; the plan to means-test winter fuel payments was also confirmed.
To balance these spending pressures and meet the new stability rule, the chancellor had to find more than £40 billion in tax increases by 2029–30. Some key revenue-raisers have been introduced.
£25.7 billion from increasing employers’ national-insurance contributions. The Budget’s largest measure increased employers’ national-insurance contributions (NICs) by 1.2 percentage points and reduced the payment threshold from £9,100 to £5,000, with an increased NICs employment allowance to partially shield small businesses. This change won’t affect workers’ take-home pay immediately but the Office for Budget Responsibility (OBR) expects about three-quarters of the tax rise to eventually be passed on to workers via slower wage growth, with the remainder reducing company profits. Once those behavioural effects are considered, the net impact of the tax rise is expected to raise £16.1 billion a year by the end of this parliament. This change also effectively reverses the employee NICs cuts under the previous government, which were never affordable.
£7 billion from measures that mainly target the better-off. The government followed through on its manifesto commitments to abolish the non-dom tax regime (which will raise £100 million)[_] and charge VAT on private schools (£1.7 billion). In addition, the chancellor announced an increase in capital-gains tax (£2.5 billion)[_], a reduction in some inheritance-tax reliefs and allowances (£2.3 billion)[_], and an increase in stamp duty on second-home purchases (£300 million), all targeted at wealthier taxpayers. Some changes (particularly to capital-gains tax) were less severe than earlier proposals, reflecting the government’s pragmatism in seeking to retain high earners and entrepreneurs in the UK.
£6.5 billion from improving tax compliance and tax debt collection. Most of these additional receipts (£4.7 billion) are projected to be delivered by recruiting 5,000 new HMRC compliance officers and 1,800 debt collectors, although a substantial £700 million is expected to come from modernising HMRC systems and data. Our own analysis has shown the potential for technology – particularly in the form of a digital ID – to help improve tax collection.
£3 billion from various smaller tax measures. These included increases to tobacco duty, air-passenger duty and vehicle-excise duty, as well as increasing and extending the rate of the energy-profits levy.
Missing in Action
Two anticipated tax measures were notably absent from the Budget. The chancellor chose not to extend the freeze on personal tax thresholds beyond March 2028, despite it being a significant revenue-raiser, and maintained the freeze on fuel-duty rates for an additional year at a cost of £3 billion. Both measures have been framed as aligning with the manifesto commitment to avoid tax rises on working people.
Extending the freeze on fuel duty, while welcome to motorists, will again erode the real-terms value of fuel duty. Under the Budget’s revised plan, fuel duty is now scheduled to rise sharply in the spring of 2026 by more than 7p a litre, equivalent to £70 a year for the average motorist. Given rising congestion and the fiscal pressures facing the country, motoring tax does need to increase – but we maintain that a better alternative to hiking fuel duty would be to introduce road pricing.
As the Tony Blair Institute for Global Change (TBI) set out both before the budget and in our 2021 report Avoiding Gridlock Britain, per-mile charges applied to both electric and traditional vehicles would represent a fairer system, safeguarding vital tax revenue and helping to reduce congestion. We continue to urge the government to explore it – and 2025 offers the best chance in a generation to introduce it.
Even these substantial tax increases will not fully off-set the increase in day-to-day spending required to repair public services, so the chancellor borrowed more to cover the difference. Consequently, the government has just £10 billion of headroom against its stability rule – a low buffer by historical standards. This could leave the government in an exposed position when facing future fiscal events, as even small changes in the economic or fiscal outlook could require additional tax increases. Moreover, if the UK is hit by a major economic shock, the stability rule will likely need to be revisited.
The initial market reaction to the Budget was fairly modest, suggesting the chancellor managed to walk the tightrope of fiscal stability reasonably well. Government borrowing costs ticked down during her statement as investors responded positively to some announcements, such as the plan to gradually rein in the forecast horizon on her fiscal rules from five years to three, which will reduce the scope for them to be gamed. However, borrowing costs then edged higher because the extent of government borrowing surprised many investors, with ten-year gilt yields ending the day up by about 5 basis points.
The Long Road to Boosting Growth
Despite its scale, the Budget’s direct impact on growth will likely be limited, as higher spending and increased taxes largely off-set each other over the next five years. This muted growth impact reflects, in part, that OBR forecasts do not yet account for additional structural reforms that the government is pursuing, such as planning reform. However, the OBR forecasts do account for the positive impact that the government’s extra investment spending will have on potential output. That said, they reflect that it will take time to materialise, boosting the level of GDP by 0.4 per cent after ten years. This shows just how challenging it will be to increase growth, particularly in the short term, and why the government is sensibly focusing on a decade of national renewal.
Full details of how extra investment will be allocated beyond next year will only become clear in the spring, when the Comprehensive Spending Review is complete. But there are already encouraging signs that the government is thinking boldly, with documents revealing an intention to deliver “mission led technology and reform-driven change”. Capital has been allocated for 2024 and 2025, and will mainly be used to bolster core services, particularly the NHS and schools.
That said, there are some promising signs of transformational investments in the short term. Notably, £2 billion of the NHS’s near-term capital will go towards essential technology upgrades, enhancing productivity, ensuring universal access to electronic patient records, improving cyber-security and expanding NHS App functionality. This is a solid down payment to help prepare the NHS for the AI era.
We look forward to the further development of these plans, given that technological investment is the most realistic route to improving public-sector productivity and supporting long-term fiscal sustainability. Our previous analysis shows that investing in AI-era technologies across a range of public services could generate up to £12 billion in annual net savings by the end of this parliament, with the potential for £37 billion by the end of the next.
The Race Ahead
This Budget marked the launch of the government’s growth and reform agenda. But with limited time since the election, it was necessarily constrained in scope, if not scale. Tax changes focused on quick-to-implement changes rather than sweeping reform, while spending plans mainly focused on the short term.
And yet there are seeds of more ambitious reform, including the forthcoming establishment of Skills England; also in the pipeline are a ten-year infrastructure strategy and a spending review that promises to prioritise technology in public services (a long-time focus for TBI). In our view, 2025 also offers the best chance in a generation to pursue fiscal reforms that will simplify the tax and benefits systems to improve efficiency; it will also be an opportunity to implement more complex reforms to motoring and property taxation to bolster growth.
As this Budget reveals, investment spending is a necessary but not sufficient condition to restore long-term growth; achieving genuine transformation will demand sustained, multifaceted efforts. The chancellor has fired the starting gun – now the race to reform begins.