Budgets by their nature divide opinion. For every group that sees a financial benefit from the government’s annual book balancing exercise another must pick up the tab.
Rarely has the divide been as starkly exposed as during Wednesday’s Budget – Labour’s first in 14 years and the first delivered by a female chancellor. Indeed, the only point of agreement among the commentariat, including business groups and environmental campaigners, was that this was a seismic political and economic event, the effects of which will be felt for years to come.
While workers celebrated a significant increase in the national living wage, for businesses, Rachel Reeve’s Budget registered high on the financial Richter scale as employers bore the brunt of the £40bn in tax raising measures needed to pay for a surge in borrowing.
Labour has argued that the parlous, and previously concealed, state of the nation’s finances inherited from the Conservative government requires that tough decisions be made. By prioritising investment in the NHS and schools, Labour says it is beginning the task of rebuilding the public realm following years of neglect.
But for a hospitality sector already operating on wafer thin margins, a hike in employer national insurance contributions (NICs) from 13.8% to 15% coupled with a lowering of the threshold at which businesses start paying the tax from £9,100 to £5,000, came as a significant blow, despite exemptions for small businesses that the government said would mean 865,000 employers will pay no NICs next year.
“In the short-term, the tsunami of employment costs coming in April will ultimately do more to hamper growth than incentivise it,” said Kate Nicholls, chief executive of UKHospitality, adding that increases to employer NICs and the living wage – which will rise by 6.7% from £11.44 an hour to £12.21 for those aged over 20 – will make it harder for businesses to support employment and invest for the future. Business rate relief will also drop from 75% to 40% from April 2025 ahead of a promise of new, permanently lower tax rates for retail and hospitality businesses from 2026/27.
Beyond the potential impact on recruitment, working hours and consumer prices, the Budget raises questions over the impact of higher costs on business investment in net-zero. Last week, more than 50 businesses, investors and financial institutions signed a letter, coordinated by the UK Corporate Leaders Group, urging the government to reassert its climate leadership on the world stage by setting “ambitious and investable” climate targets for its 2035 nationally determined contribution (NDC). Part of Labour’s pitch to the private sector is that it will invest in the infrastructure that makes the UK an attractive place to do (sustainable) business, on the proviso that public funds catalyse private investment in technologies and skills. Yet the Office for Budget Responsibility, in its Budget assessment, explained that “higher government investment increases incentives for businesses to invest, but in the near term this is more than offset by the crowding out effect of the fiscal loosening in this Budget”.
This was certainly a budget of big spending commitments, enabled by a change to financial rules to account for the value of financial assets as well as the cost. Green hydrogen and carbon capture projects are among the beneficiaries of an additional £100bn in public investment over the next five years, while the automotive sector will receive extra funds to support the transition to electric vehicles.
Environmental groups, however, were largely sanguine in their response amid frustration that neither the climate nor nature crises merited a mention in the chancellor’s speech (on a day when extreme flash flooding devastated parts of Spain). “Rachel Reeves pledged to be the UK’s “first green chancellor” but, despite some positive signs, investment in climate and nature isn’t yet at the scale needed to fully earn that title,” said Angela Francis, director of policy solutions at WWF.
Friends of the Earth was rather more blunt in its assessment: the Budget fell “staggeringly short of what’s needed to address climate and nature emergency”, according to head of policy Mike Childs.
There was relief that the annual budget for nature-friendly farming would be maintained at £2.4bn amid reports of spending cuts, although many farmers and environmental groups wanted to see greater recognition of the intrinsic value of ecosystem services. As farmer and Wildfarmed co-founder Andy Cato wrote on LinkedIn: “No economy survives the collapse of its ecosystems or the breakdown of its food supply because soil health is too compromised to infiltrate and store torrential rainfall. Recognising these costs now means problems can be fixed for a tiny fraction of their future cost.”
Almost every budget includes a proposal that has the potential to create aftershocks in the days following the event (remember George Osbourne’s ‘pasty tax’?) and the early signs are that, this time around, farmers are the ones experiencing the tremors. Changes to inheritance tax will see farming assets over £1m subject to taxation at an effective rate of 20%, a move the NFU said put the futures of many family farms and the people who farm them at risk. Reeves insisted that around three quarters of farms would not be affected by the change, but farming leaders took a different view as to the implications for farm sustainability and food security. “This budget not only threatens family farms but also makes producing food more expensive, which means more cost for farmers who cannot absorb it and it will have to be passed up the supply chain or risk the resilience of our food production,” said NFU president Tom Bradshaw. Expect this debate to rumble for some time.
Elsewhere, there were further signs the government is willing to use fiscal measures to incentivise healthier food and drink production and consumption. The soft drinks industry levy will be increased in line with inflation and the government will also review the current sugar thresholds and exemption for milk-based drinks.
Reeves also committed £30m next year to expand school breakfast clubs, albeit Sustain, the food and farming charity, noted how the funding represents less than 10% of the estimate in the Labour Party manifesto for rolling out universal primary school breakfast provision.
All in all this was a Budget of historic significance, the success or failure of which will be judged over years rather than days, weeks or months.
Also covered in this week’s Footprint news is research showing a slowdown in the decline in sales of plant-based foods and a call for drinks companies to take action on water risk.
And in a comment following the recent House of Lords report on obesity, nutritionist Ali Morpeth calls on the government to set the UK on a path to better health.
