Re:Act Autumn Budget
Chief Executive
Today’s Budget was one of the most consequential of recent times. For the Government, of course (deeply unpopular, struggling to deliver on their stated priorities, with a PM teetering on the brink of a leadership challenge), but more crucially for the country. The cost-of-living crisis rumbles on and growth remains anaemic. Public faith in the political class’s ability to fix anything has collapsed — unsurprisingly given the state of the public realm — and the public finances are unsustainable. A route to prosperity is urgently needed.
We did not get that — with the big era-defining challenges ducked, as discussed below.
The Red Book states that the Budget measures deliver against the Government’s “economic and fiscal plan underpinned by the principles of stability, investment and reform that will enable the conditions for sustainable growth and reduce the cost of living”.
Let’s start with growth. The OBR has revised up — 1.5% from 1% — its forecast for 2025 (a big part of which is down to frontloaded investments the Government are making), but has revised down its forecast for every subsequent year of the Budget period. To be fair to the Chancellor, this includes a downgrade to the medium-term rate of productivity growth, which is not her fault.
Nonetheless, in determining the impact of the Budget the OBR states: “We have assessed that none of the policy measures in this Budget have a sufficiently material impact to justify adjusting our post-measures potential output forecast”, or in other words, nothing the Government has done will shift the dial. “The impacts on government and business investment are too small to impact potential output” when factoring in reductions in household consumption due to increases in personal tax. Funny that.
The OBR’s forecast for business profits and investment have also been revised down compared to March. And it’s worth noting that the Government’s Employment Rights Bill — widely predicted to be deleterious to many businesses — remains unscored by the OBR due to insufficient detail.
This was not, then, a Budget to radically boost growth, as we discuss below.
So what of the cost of living? I’m afraid the news is equally as bleak. Real household disposable income per person has been revised down slightly on March’s forecast, as has the rate of growth: “growth averages ¼ percentage points a year less across the forecast”. Which is not ideal when March’s forecast growth rate was already pitiful. Hiking taxes on working people will do that.
Freezing regulated train fares, extending the fuel duty freeze and removing some green costs from energy bills will provide some respite, but with inflation remaining well above the 2% target and higher than forecast in March, families will continue to feel the squeeze.
This was not, then, a Budget to boost the finances of ‘working people’.
The public finances are also not looking much healthier. The Chancellor made a big deal of meeting her fiscal target on debt — which might be the most important of the fiscal measures. In fact debt-to-GDP will be higher at the end of the forecast than today (96% versus 95%), it’s just that it gets worse in the middle, so by the letter of the rule, she can claim it is falling by the fifth year of the forecast.
“That would leave the UK with a debt-to-GDP ratio that is around twice the advanced-economy average and the sixth-highest among advanced economies. And the UK would still be devoting more of national income to paying the interest on that debt than at almost any time in its post-war history”. That’s about as scathing as the OBR can get.
I’ll put it another way, the Government is sacrificing the country’s future to placate its backbenchers today. Having promised after the last Budget she would not need further tax increases, and telling us that extending the threshold freeze “would hurt working people”, the Chancellor has done the opposite. And in doing so — increasing tax revenue by a further £26 billion by 2029-30 and taking us to a “historic high” — she has used that money partially to increase her fiscal headroom, but mostly to expand the welfare state. And while she may pledge welfare reform, absent a plan, this looks deeply unserious. More on that too below.
Read on for the team’s more detailed analysis.
🦆 DUCKING THE BIG ISSUES
Growth
This Government’s “first mission” is growth, and the Chancellor stood by that at the despatch box. But the outlook at this Budget is more pessimistic than ever — the UK is set to become an even lower-growth economy, with the OBR revising forecasts down from an average of 1.8% growth per year to 1.5% per year between now and 2029. If the economy doesn’t grow, then people will continue to see their cost of living stagnate, and the proceeds of that growth can’t be used to tackle the biggest challenges we have. In a no-growth world, everything becomes zero-sum — for one group to be better off, others have to be worse off.
There are some steps in the right direction, but none go far enough or fast enough.
The kind of deregulatory efforts the Government has announced, including a plan to reduce administrative costs from regulation by 25%, are nowhere in sight. The flagship Planning and Infrastructure Bill, thought to deliver much of this target, will reduce the burden by just 1.5%.
The Government are trying to clear planning backlogs to build more homes. The Chancellor announced an extra 350 planners, meaning a total of 1,400 new staff in the planning system between 2024 and 2029. But it’s unlikely to help meet the 1.5 million homes target, particularly when new regulations have brought housebuilding in London (where it is most needed) to a standstill this year.
The Chancellor missed the opportunity to accept in full the recommendations of the Government’s own Nuclear Regulation Taskforce, instead committing to come back to it in three months.
Businesses drive growth, but aren’t getting the support they need. A new UK Listing Relief (giving firms that list in the UK a three-year holiday from stamp duty) is welcome, but isn’t nearly enough to create a tax framework which supports growth. Indeed, business confidence and job creation have fallen since the Government raised Employers' National Insurance Contributions last year.
Fiscal devolution
Real fiscal autonomy is something of a holy grail for both the advocates of localism and the proponents of growth policy. It would enable different parts of the country to play to local strengths, and to set up incentives to boost economic performance. This Budget offers some incremental progress toward a more grown-up fiscal system for local and regional government, but the radical step-change is clearly still some way off.
The headline move of a new Mansion Tax — sorry, a new High Value Council Tax Surcharge — on homes worth over £2 million, disappoints. The proceeds of this surcharge will be paid to the Treasury rather than to the local authority. And in the absence of a full-scale Council Tax revaluation (the last was in 1991), this change leaves us with a markedly regressive tax, and one that is likely to disrupt the housing market, encouraging buyers, sellers and developers to bunch just below the threshold, underinvest in improvements that might push a property over it, and to game valuations rather than respond to genuine housing need.
Mayors will also now be given the power to levy tourist taxes and will retain the revenue locally, allowing them to reinvest in their economies. The detail will emerge after a consultation launched today. Whether the levy will take the form of a fixed flat rate per night (Wales) or a variable rate depending on the class of accommodation (Scotland) remains to be seen — but this fiscal devo ‘test balloon’ (a pilot, effectively) will need to be seen to succeed.
The news on Business Rates — though far short of the complete rework that we have previously argued for — is potentially more interesting, though less noticed. Government will extend Business Rates retention (BRR) pilots in Cornwall, the West of England and Liverpool City Region to 2028-29; consider allocating MSAs a direct share of business rates and allowing them to establish their own BRR zones; and, “subject to business case”, permit Leeds to retain 100% of business rates growth above an agreed baseline within a designated city centre zone. This is another small shift towards genuine regional fiscal autonomy. But after almost a decade of BRR pilots in one form or another — what additional evidence are we really hoping will emerge from this one?
Welfare reform
Some time ago, an Economist column suggested the British State was on track to become the NHS with nukes. Today, the author might revise that to a welfare state with (insufficient) nukes. The social security budget is ballooning at a stomach-churning rate. It is one of the central drivers of the OBR’s terrifying long-term fiscal risks forecast that sees debt-to-GDP reach 300%. Yet instead of gripping this, a combination of the U-turn in delivering (very modest) cuts to disability-related benefits and the decision to abolish the two-child benefit cap, means “Budget policies increase spending in every year and by £11 billion in 2029-30”. In the context of a welfare budget forecast to jump from £314.7 billion in 2023-4 to £406.2 billion in 2030-31, this is unfathomable.
The Budget does contain a handful of measures aimed at reducing spending, largely administrative, including reintroducing face-to-face disability benefit assessments, reducing subsidies to Motability, changing the voluntary NICs rules to reduce the ability of people to claim the state pension abroad and bringing together the administration of pensioner housing benefit and pension credit. All are fine as far as they go, the problem is they don’t go very far at all. Ultimately this is a Budget that raises taxes on working people — many of whom are struggling to make ends meet — to pay more social security to those who are (largely) not working.
Sound public finances
The core job of any Budget is to balance spending, tax and borrowing, and show the Chancellor has a credible path to fiscal prudence. The Chancellor has stuck to her fiscal rules, at the cost of keeping her manifesto promises to not raise taxes on working people, and restored some headroom — up to £22 billion, double the £10 billion the Chancellor had at the last forecast.
But spending, taxes, and borrowing are all forecast to rise until 2029-30, with the size of the State continuing to grow. The tax burden will reach an all-time high of 38%. Debt is set to rise, meaning we will still spend £100 billion a year servicing debt payments. And in an era of higher inflation, borrowing costs are more sensitive to interest rate changes than ever.
The long-term trend of an ageing population driving higher NHS spending, the political choice to grow pensions faster than earnings through the triple-lock, and the sudden increases in sickness and disability benefits (expected to rise to over £100 billion a year by the end of the period, from £76.8 billion last year) all continue to run their course in this Budget. Meaning the long-term trajectory of the UK’s public finances remains unsustainable.
There are some signs of progress. Alongside the Budget the Treasury have committed to significant reforms to the spending framework, to reduce waste and improve public accountability. We welcomed their moves to reduce the number of top-down controls on individual types of departmental spending, and move towards a model where the Treasury focuses on the larger, more strategic issues — an approach we argued for in our paper The price of everything.
However, when the tax rises which offset most of the additional spending pressures don’t raise much revenue before 2028-29, we should be sceptical that these plans will be delivered. A year out from a General Election, it seems much more likely that the Government will increase spending and reduce planned tax changes in this Budget, further weakening the public finances.
⚖️ JURY'S OUT
Young people in the economy
“In Q3 of 2025, youth unemployment currently stood at 15.3%, with the rate of young people not in education, employment, or training (a cohort referred to as NEET) at 12.7%”. The stats speak for themselves. The scale of the challenge facing young people entering the workplace is increasingly daunting. However, the measures announced today are mixed, and in some ways contradictory.
Increasing the National Minimum Wage is superficially appealing, but narrowing the differential cost of hiring an 18-20 year old compared to an older worker risks reducing the likelihood of employers doing so — if wages are basically the same, why hire someone with no or negligible work experience?
But at the same time the Government is delivering a new £820 million Youth Guarantee scheme. Targeting young people at risk of long-term unemployment, it will be offered to 18–21 year olds who have been on Universal Credit for 18 months without securing paid work or training. The scheme funds 100% of employment costs for 25 hours a week at the relevant minimum wage. But it’ll only work if the scheme leads to long-term employment, rather than providing businesses with short-term, taxpayer-funded labour they never intend to retain.
Several changes have also been made to the apprenticeship offer as part of the Apprenticeship Levy’s transition into the Growth and Skills Levy, to try and increase employer take-up and use. This includes extending full government funding to apprentices aged 25 and under (up from an age limit of 22), eliminating the current 5% co-funding contribution required from SMEs. Apprenticeship numbers have stalled, and much of the infrastructure doesn’t exist to deliver the kind of training that employers need, particularly in key sectors like construction — getting this in place will be crucial to the success of the Levy.
Further measures will be expected from Alan Milburn’s independent review of rising levels of youth inactivity. But until then, the jury is still out on whether the Government’s plans are enough.
🧐MISSING IN ACTION
A plan for the SEND time bomb
At present, councils redirect hundreds of millions of pounds from other priorities to meet Special Educational Needs and Disabilities (SEND) demand, contributing markedly to the sector’s financial crisis. But rather than providing a plan for tackling the costs, this Budget gives us a plan to make a plan, with a new approach promised for “early in the new year” as part of a Schools White Paper. More spend today, reform tomorrow. The one thing we were told is that from 2028 the costs will be absorbed by departmental budgets — most likely the Department for Education.
There are two separate things that we, and the OBR, are worried about here. The first is that offloading the challenge to Whitehall within the budget envelope established by the recent Spending Review would mean, by 2030, up to £9 billion of unfunded new commitments which would presumably need to be paid for from the rest of the education budget — cue cuts elsewhere.
But before we get there, the ‘statutory override’ — which has enabled councils to keep balancing their books while SEND costs have boomed — will continue on until 2027-28, by which time the deficits produced by it are estimated to reach £14 billion. When DfE takes over, those deficits will be back on council balance sheets, and push many of them straight into bankruptcy.
Adult social care
As ever, reforms and funding to fix adult social care are absent from this Budget.
Rather than explain why this is an issue, see last year’s Autumn Budget Re:Act, which highlights the constant prioritisation of the NHS (and especially hospitals) for new funding, while social care is overlooked. Or look at Re:State’s 2024 Snap analysis: The Chancellor's fiscal statement which details the consistent absence of a plan to fix the social care crisis. Or you could look at our Spring Budget 2023 snap analysis with “our regular reminder that social care needs sorting", which is literally copied and pasted from our 2021 Spring Budget snap analysis. You get the point: fixing adult social care is a can that’s seemingly forever kicked down the road.
🔒TWO CERTAINTIES
Bad for working people
One certainty from this Budget is that, despite the Chancellor’s best efforts to spin it, the measures are overall bad for working people. The freeze on income tax and national insurance thresholds means that as wages rise, more people have to pay income tax or enter higher tax bands: known as fiscal drag. The result of this ‘stealth tax’, according to the OBR, is 780,000 more people being pulled into the basic rate and 920,000 being pulled into the higher rate — most definitely working people. This fiscal drag will raise an estimated £8.3 billion in 2029-30.
Similarly, the Chancellor announced that the Plan 2 student loans repayment threshold — the point at which students who started university between 2012 and 2023, and took out loans, start paying them back — will be frozen for three years. This means more working people contributing (and contributing more) towards their student loan debt. Or, not to put too fine a point on it, more money coming out of working people’s paychecks.
Inadequate on defence
Another certainty from this Budget is that the Government is nowhere close to getting serious about defence. With no new spending for defence announced, the best that can be said is that the Budget doesn’t cut previous commitments.
This month, a Defence Committee report found the UK lacks a plan to defend itself or its overseas territories, highlighting insufficient capacity, skills, innovation, procurement processes and financing. In this context, and with an increasingly unstable and dangerous geopolitical reality, the Government needs to start taking defence more seriously, and matching that with more funding. Yet defence spending is set to increase from an expected 2.4% of GDP in 2025 to just 2.6% of GDP by 2027, with no clear path to 3% or, as many think is needed, higher.