UK Budget

This UK government came to power promising that economic growth was its primary mission. Under the new leadership of Andy Burnham, the government has shifted this to targeting growth in every postcode.

John Healey’s first Budget suggests that despite the huge parliamentary majority enjoyed by the Labour Party, they have not mustered the political backbone to achieve this mission. For the remainder of this Parliament economic growth, as seen by the Office for Budget Responsibility, is expected to average an anemic 1.4% a year.

Throttled by a supply side of the UK economy that amplifies inflationary shocks, the elevated cost of building, the cost of employment, and the cost of energy remain fiendish impediments. In its latest forecast, the OBR downgraded its estimates of how many new homes will be built this decade by 190,000. They also took a negative view of the economic impact of the recent Employee Rights Act and expect UK inflation to again average more than other advanced economies. A further increase in tax on landlords is expected to reduce supply and drive up rents. This was not a fiscal watchdog lavishing praise on the government’s growth agenda. It was at pains to deliver some home truths. This reflects well on the independence of the new OBR chair, Jonathan Haskel.

The 2026 Budget itself was in many ways something of a non-event. The least consequential set of tax and spending policies since before the COVID-19 pandemic. Combined, these fiscal measures totaled a modest £31bn of change across the next five years. In public finance terms, that is little more than a rounding error. Whilst that minimalist approach has its merits, it also puts the UK economy in a holding pattern. It suggests confidence amongst the Labour leadership that when latest global inflation shock eases, growth will rebound. This flies in the face of all available evidence.

UK energy costs are some of the highest in the world, the cost of employment has risen at the fastest rate in the developed world over the last decade, the cost of capital for business and government is the highest in the G7. The cost of building infrastructure such as nuclear power stations, railways, trams, airports, and bridges makes maintaining a competitive UK business environment an uphill battle. Where a scythe is needed to hack at the regulatory and levy thicket that stifles competitiveness, Healey chose a blunted scalpel.

But this is not to say there weren’t encouraging pro-growth policy measures in the Budget. The issue for economic growth is how constrained they all are.

For UK entrepreneurs excited about the launch of Founders Relief - a reduced capital gains tax rate on up to £10m of disposals - they will have been dismayed by the halving of the lifetime limit of Business Asset Disposal Relief to just £500,000. This is a government that fosters risk-taking with one hand and scolds it with the other.

For savers enthused about the reduced complexity of the Cash ISA announced in the Budget, there was fresh complexity with the lifetime ISA being replaced by a new “First Time Buyer ISA” to disrupt the stability of the savings landscape. Actively incentivising the holding of cash and housing equity - over more productive assets – is a backward step for growth.

For struggling households encouraged by the £150 off energy bills as result of a Household Energy Payment and extended VAT cut, the reality is an energy price cap that is poised to go up by more than £600 a year by next spring. Two decades of cross-party failure on a competitive UK energy policy continues to undermine the UK’s growth prospects. More radical reforms on zonal energy pricing, scrapping environmental levies from consumer bills, reopening contract-for-difference arrangements, and full-throated support for the North Sea energy and chemical industry were ducked, again.

This speaks to a government of calculation rather than conviction. When it comes to economic growth, they appear uncomfortable with allowing animal spirits to take hold. Policymaking is a series of stage-managed projects and initiatives. Far from fostering an innovation nation it leads to businesses assuming their growth (and profit) prospects are capped. Over time this leads to capital choosing other geographies where it can achieve better returns.

For now, this approach looks set to avoid a painful reckoning. But seasoned observers of the UK’s public finances know what is coming. Having kicked a challenging Spending Review and defence spending commitments into 2027, economic growth is not coming to the rescue. The public spending reductions penciled in for the end of this parliament still must be divided up amongst spending departments. They will be on a scale that the 2024 intake of Labour MPs have not seen before. Financial markets remain sceptical that they will recoil and rebel. Whether this forces the leadership’s hand into fresh tax increases or a new electoral mandate will continue to weigh on sentiment.