UK Budget leaves difficult questions unanswered

Yesterday’s UK Budget left many questions unanswered. The additional £70bn of public spending will provide a stimulus to the UK economy in 2025, even after £40bn of tax rises. The Office for Budget Responsibility estimates the net £30bn giveaway (1% of GDP) will add 0.5 percentage points to GDP growth in 2025, but the overall impact is uncertain. Given the £25bn rise in employer national insurance contributions, firms will scale back employment and investment plans, push back against wage increases or raise their prices. It may also take longer than expected to deploy additional funds for public capital expenditure.

After near-term stimulus, Labour’s plans to rein in public sector borrowing from 4.5% of GDP this budget year, to 2% by the end of the decade, rely on spending restraint from 2027 onwards. The Institute for Fiscal Studies (IFS) has already said these spending plans look unrealistic. For now, bond investors have given new Chancellor of the Exchequer Rachel Reeves the benefit of the doubt, albeit with UK 10-year gilt yields rising to 4.5% and sterling depreciating sharply to 84.3p against the euro, today. However, yesterday’s Budget is clearly far from a transparent deficit reduction plan.

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Bank of Ireland Economics Weekly 31st October 2024

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