The Autumn budget delivered large increases in spending, taxation and borrowing. Public spending is set to increase by GBP 70 billion per year over the next five years. This equates to roughly 2.5% of UK GDP.1 Around two-thirds of this will be used for current spending with the other third intended for capital spending. The Office for Budget Responsibility (OBR) expect real current government spending to rise by 1.0-1.5% per year while government funded investment is seen remaining broadly flat at 2.25% of GDP rather than declining as was previously anticipated.
Investment Insights • MFN
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UK Autumn budget delivers tax increases to fund higher spending
On 30 October, Chancellor Rachel Reeves became the first woman to deliver a budget in the UK, outlining increases to taxes and additional borrowing to fund higher spending and investment. In this Macro Flash Note, Economists Sam Jochim and Joaquin Thul summarise the main points.
Around half of the increase in spending will be funded through higher taxation. The OBR expects tax revenue in the UK to rise to around 38% of the UK’s GDP by 2030 as a result, the highest level on record.2 The remainder of the fiscal expansion will be funded by an increase in government borrowing. Although borrowing is still expected to decline as a share of GDP, it is forecast to do so by less than before the delivery of the Autumn budget (see Chart 1). The measures to fund the increase in spending are summarised in Table 1.
Chart 1. OBR government borrowing forecast (% GDP)
Source: OBR. Data as at 30 October 2024.
Table 1. Summary of measures to fund spending increase announced in Autumn budget
Source: BBC and OBR. Data as at 30 October 2024.
Following the budget, the OBR now expects the UK economy to grow at a faster rate over coming years. However, the boost to GDP growth is expected to be temporary and the associated rise in interest rates in response to higher borrowing will likely crowd out private investment, marginally detracting from GDP growth in the final two years of the OBR’s five-year forecast (see Chart 2).
Chart 2. OBR’s real GDP forecast (% change, year-on-year)
Source: OBR. Data as at 30 October 2024.
In addition, the budget is anticipated to put upward pressure on prices, with inflation forecast to rise to 2.7% in mid-2025 before declining gradually to target by 2029. This reflects both the inflationary impact of the fiscal expansion and the rise in costs for employers due to the National Insurance increase being passed through to prices.
We still expect the Bank of England to reduce interest rates gradually as underlying domestic inflationary pressures decline from their current levels. Nonetheless, the budget raises the likelihood that the terminal rate is 0.25-0.50% higher than prior to the budget.
In summary, the Autumn budget was, in the words of the OBR, “one of the largest increases in spending, tax, and borrowing of any single fiscal even in history”.3 The result is that UK GDP will likely see a temporary boost, accompanied by higher inflation and a slightly greater degree of monetary restriction. The higher level of inflation and interest rates could put upward pressure on sterling, although worsening fiscal metrics with only a short-term expected boost to GDP growth could offset this. Greater government borrowing has already resulted in higher UK government bond yields, something that is expected to persist for the time being.
1 Calculation based on UK GDP as at Q2 2024. Source: Office for National Statistics and EFGAM calculations. Data as at 30 October 2024.
2 It should be noted that although it is projected to reach its highest level by historical standards, UK tax as a % of GDP would remain below levels seen in many European countries. For example, the OECD estimates that in France and Germany it was 46.1% and 39.3% respectively in 2022.
3 https://obr.uk/docs/dlm_uploads/Presentation_speech_October_2024.pdf