On 30 October Chancellor Rachel Reeves delivered the Labour
Government's first
Budget. The Budget completes Phase 1 of Spending Review
2025, resets departmental budgets for 2024/25 and sets budgets for
2025/26. Phase 2 of the Spending Review will conclude with a
further budget in late Spring 2025, which the Government expects to
include the announcement of over £100 billion of additional capital
investment over the next five years.
New Fiscal Rules
The Government is committed to borrowing only for investment.
This means bringing current expenditure into line with
revenue. It also wants to see public net financial debt to
fall by 2029/30. There has been much speculation in the media about
how the definition of public debt might be tweaked to allow more
headroom for borrowing. The current debt definition is Public
Sector Net Debt excluding the Bank of England (PSND ex
BoE). The Bank of England's net debt is expected to fall over
the next few years as a decade of "quantitative easing' is replaced
by a regime of 'quantitative tightening' reverting to the pre-2021
measure of debt - PSND - by again including the BoE would allow
around £16 billion more borrowing in the immediate future.
Switching to a target based on Public Sector Net Financial
Liabilities (PSNFL) would provide even more borrowing headroom-up
to an estimated £50 billion. This is because PSNFL acknowledges
that certain items, such as loans, which are treated as regular
expenditures under PSND, are actually financial assets that can
generate returns.
Even more radical would be to target Public Sector Net Wealth
(PSNW), bringing public non-financial assets such as
infrastructure, schools, hospitals and public housing into the
calculation. Much commentary has rejected this option
because, although a notional value can be assigned to these assets,
most do not yield a direct financial return. An exception, of
course, is council housing.
As expected, the Budget ties the Government's target to PSNFL
although the OBR is tasked to track and report on the progress
against PSND, PSNW and other measures.
Public Investment
Spending plans inherited from the previous Government were for
public sector net investment to fall from 2.6% of GDP in 2023/24 to
1.7% of GDP in 2028/29. The Government intends to increase public
capital investment by £100 billion over the next five years to
reach an average of 2.5% of GDP. The Budget document quotes
the OBR in support of its view that this public investment will
encourage additional private investment, increasing GDP by an
additional 0.1% in 5 years, rising to 0.3% in 10 years. The OBR
forecasts the economy to grow by 1.1% in 2024, 2.0% in 2025 and
1.8% in 2026, falling to 1.6% by 2029. Inflation is forecast to
average 2.5% in 2024 but increase to 2.5% in 2025 before falling
back towards 2% in later years.
Supporting people with the cost of living
The National Living Wage will increase by 6.7% to £12.21 per
hour from April 2025. The Government has pledged to retain
the State Pension triple-lock for the duration of this Parliament.
This means that pensions will increase by 4.1% in 2025/26, in line
with earnings increases, which were higher than inflation as
measured by CPI in the 12 months to September. Working-age
benefits will remain linked to CPI, meaning they will increase by
1.7%.
Debt repayment deductions from Universal Credit have been
capped, but the government has stopped short of more fundamental
reforms, such as removing the two-child limit or the Bedroom Tax.
Meanwhile, the rollout of Universal Credit is set to
accelerate.
Homelessness
As part of a package of measures aimed at increasing local
government 'core spending power' by 3.2% in real terms in 2025/26,
the Budget provides £233 million in additional spending in 2025/26
for homelessness prevention, bringing total spending in that year
to £1 billion. A cross-government taskforce on homelessness and
rough sleeping will inform Phase 2 of the Spending Review and
spending plans for future years.
Housing investment
The Budget promises steps 'to
kickstart the biggest increase to social and affordable housing in
a generation'. It includes, as previously announced, an
increase of £500 million to the Affordable Homes Programme, which
it is claimed will support the building of up to 5000 additional
affordable homes. An output of 5000 new homes is only likely
to be feasible if the total includes a
significant proportion of shared ownership homes; Homes England
will have to decide between maximising the number of homes built
and meeting the acute need for more socially rented housing.
The number of homes that can be provided also depends on the
regional balance - homes in London and the South East are more
expensive to build. Phase 2 of the Spending Review will
decide the details of future grant investment after the current AHP
ends in 2026.
Additional funding is
promised in 2025/26 for building safety remediation works, with
details to be announced later this Autumn.
Planning
The Budget allocates £46 million to support the recruitment of
300 graduates and apprentices in local planning authorities,
accelerate the development of large sites, and increase the
capacity of these authorities.