Will the UK’s 2024 Budget Bring Economic Growth?
On October 30th, UK Chancellor of the Exchequer, Rachel Reeves presented her 2024 budget, outlining measures intended to raise revenue and stimulate growth. After four months of preparation, Reeves unveiled a plan aimed at tackling Britain’s strained public services, long-standing underinvestment, and dreary fiscal projections. The budget includes £40 billion in new taxes—about 1% of GDP—largely raised through increased National Insurance contributions for employers, alongside smaller adjustments to inheritance and capital gains taxes.
The primary aim of these tax hikes is to stabilise public finances, addressing Britain’s historically low levels of both public and private capital investment within the G7. A significant portion of the additional funds, roughly one-third, will be allocated to infrastructure projects, a key area for driving future economic vitality. While some waste in capital expenditure is inevitable, such investments are crucial to reviving an economy struggling with stagnation.
Yet, the decision to raise employer National Insurance rates, while sparing small businesses, could inadvertently incentivise self-employment over employment and discourage small businesses from seeking growth. This move also diverges from Labour's manifesto pledge not to increase taxes for working people. The Office for Budget Responsibility (OBR) has indicated that workers may still feel the pinch through rising consumer prices and slower wage growth, suggesting that an increase in income tax might have been a more straightforward and effective approach.
The budget also places a heavier tax burden on the highest earners, but these measures risk undermining the UK's attractiveness to foreign investors while yielding only modest gains in revenue. Experts argue that European-style welfare states are best funded by broad-based taxes rather than overly targeting top earners, which may lead to diminishing returns over time.
On the expenditure side, the National Health Service (NHS) is a clear priority, with an additional £22.6 billion earmarked for its operational budget over the next two years. Similar funding increases are allocated to education, transportation, and defense. However, critical areas like the prison system and social care will see less investment, leaving some services still under-resourced.
Overall, the budget has done little to instill confidence in the government’s ability to drive growth and mend the public finances. The Economist notes that any meaningful reform of public services will require the government to tackle entrenched unions and other vested interests—an essential step if Labour is to stimulate the economic growth needed to fund these services sustainably. With public tolerance for further significant tax hikes waning, the government’s future options are limited.
According to the OBR, the UK economy is expected to see modest growth in the next two years as a result of this budget. However, in the three-to-five-year outlook, the effects of the increased employer National Insurance contributions could weigh down disposable income and hinder private investment, tempering any long-term economic gains.