Michael McMahon, Professor of Economics at the University of Oxford, outlines the key points from the UK Government’s Autumn Budget 2024, announced today.

There were many aspects of today’s budget that were well-signposted in advance.

The fiscal rules were adjusted to make more room for investment – they will now separate day-to-day spending which will aim to balance that spending, and public investment. Both will be applied in year three now instead of year five. The objective of fiscal rules isn’t to reduce borrowing per se, but rather to provide a sensible and credible benchmark that can guide government choices. So, what really matters is not about one rule or another, but whether it is viewed as a reasonable guide to policy, and whether it will be adhered to.  

These changes and the freedom to borrow mean a series of investment plans amounting to £100bn over the next five years. This is necessary after years of under investment. And it is to be welcomed that the Chancellor has committed to multi-year capital budget horizons. But there is still a lot of uncertainty. The challenge with public investment is that just as the cost of cutting public spending is not felt for many years, it takes years to catch up years of under-investment. If it pays off, and delivers the claimed 1.4% increase in the level of GDP, this will help with extra tax revenue in the future. But this relies on the successful delivery of the infrastructure and keeping the cost of major projects under control.

There were also commitments to increase NHS funding, both in current and capital budgets. Like public investment, the challenge is to develop a strategy that is supported and backed over the many years it will take to make big differences.

The biggest news is the increase in employers’ national insurance contributions…This is a large increase and puts a huge burden on the business sector for raising extra tax revenue. The risk with this is that it hits hardest on those larger firms which employ lower-earning workers, and ultimately is a tax that will hit workers (even if indirectly).

The biggest news is the increase in employers’ national insurance contributions – not just the increase from 13.8% to 15%, but the reduction of the threshold from £9100 to £5000. This is a large increase and puts a huge burden on the business sector for raising extra tax revenue. The risk with this is that it hits hardest on those larger firms which employ lower-earning workers, and ultimately is a tax that will hit workers (even if indirectly). This was perhaps predictable given the manifesto commitments to not raise the major taxes on individuals. 

So, we didn’t get a direct increase in income taxes on workers, but there was one surprise which was the decision not to extend the freeze to income tax thresholds; freezing thresholds is like a tax increase but from 2028/29, the thresholds will increase with inflation. So further out there is a commitment to reduce taxes on income.

There were other tax increases that raise bits and pieces at the margin. But at some point, it is likely we will need a decision on how to balance demand for public services such as the NHS and the support for pensioners, challenges that are getting harder over the coming years, with a decision on how to pay for these commitments. At some point in the future, it is likely that higher taxes on income may be necessary unless we accept as a society that we will reduce such spending. And while it is not popular, increasing the basic rate of tax is one way to raise funds sustainably for such spending; going from 20-22% on the basic rate of tax would raise about £12.5bn and would bring the basic rate of tax back to the level of 20 years ago.