UK’s steady as she goes budget: More spending and another record high tax burden

Labour’s 3rd budget has been and gone, and the bond market’s verdict is a decent B+. The budget focussed on growth, rather than benefits, but unsurprisingly did not cut government spending, instead pushing that out to the government’s spending review that is due later this year.  

The bulk of Healey’s announcements were already well signposted before today’s Budget. There was a surprise announcement of a new ISA with details to follow, but overall, the news in this budget was the OBR forecasts. 

Bank stocks surge after Healey’s less than expected tax rise 

Bond yields are falling moderately on the back of this Budget, and the FTSE 100 has reversed earlier losses on Wednesday and is now rising by 0.2%, sterling is mostly flat on the day. The FTSE 100’s reversal is being led by the banking sector. This comes after the announcement that the banking tax surcharge was less than feared, rising to 6% compared to 8%, and the extra tax will be time limited to 15 months from January. Lloyds, NatWest, Barclays and Standard Chartered are all higher by approx. 3% today, although gains could be limited as banks are milked further to pay for the £100 giveaway for households in council tax bands A-D to pay for rising energy bills. 

Borrowing set to be higher than forecast 

The OBR raised inflation forecasts and reduced the 2027 growth forecast by 0.5% compared to March’s forecast. Growth is expected to slow to 1% next year, down from 1.25% this year. Borrowing is also set to rise by more than £11bn on average per year more for the rest of this parliament, compared to the March forecasts due primarily to higher inflation forecasts. This increase will also mean that the UK’s debt consolidation plan, which was lauded by the IMF recently, will slow in the near term compared to previous plans. 

This is not a concern for the bond market today, but it could be an issue down the line, especially if growth is weaker than expected at any stage over the coming months. The OBR says that based on the current fiscal programme, the UK’s plan to be in a fiscal surplus by 2029-2030 is met by a margin of £15bn. However, that depends on a lot of departmental spending cuts right before an election, which Kemi Baddenoch is right to call out. 

Debt interest costs surge 

The OBR also says that debt interest costs will be £15bn higher this year than previous forecasts due to the rise in bond yields this year. Although the rise is a global phenomenon, UK yields are nominally higher than our peers, and this is why debt interest costs are eye watering. 

Tax burden set to reach a fresh record high 

The increase in the UK’s borrowing forecast is due to the higher cost of welfare spending and pensions. This highlights one big political trip risk for the PM: while working people will see taxes rise, due to the extension of the freeze in income tax thresholds, benefits are going up in April. 

Tax burden could make a new election manifesto tricky for Burnham 

The OBR also highlights the UK’s massive tax burden, which is rising yet again. Tax receipts are set to rise to 42.9% of GDP by 2031-32, a record high. The OBR does not see tax cuts on the horizon for this Labour government. Record high taxes come even though the Labour government is sticking to its manifesto promise not to hike income tax, VAT or corporation tax. The question is, if Burnham is planning to have an early election, how can he possibly put higher taxes on the manifesto when the tax-to-GDP ratio will be 6% above pre-pandemic levels. 

Spending is not set to fall in this parliament, with the bulk of spending coming from departmental spending cuts in the coming years, and not from benefit reduction, which is a popular option among voters. 

Overall, this budget is steady as she goes from a labour government: more spending and higher taxes, with a new type of ISA, the starter ISA, thrown on top.