Rachel Reeves’ First Budget: A Stress‑Test for Public Finance
Coming up this Wednesday, Rachel Reeves is about to unveil her debut Budget as Chancellor. This is not your ordinary fiscal recap; it’s a Tax‑Borrow‑Spend showdown that promises to shake the fiscal status quo.
The Two‑Part Playbook
- Debt Refashioning: The government plans to swap the old “Public Sector Net Debt” (PSND) with a brand‑new “Public Sector Net Worth” (PWNW). In plain English, this tweak should allow the treasury to borrow more without over‑inflating debt figures.
- Tax Upsurge: To back up an ambitious spending spree—especially aimed at the NHS—the Budget will hike taxes. The idea? A little extra tax revenue to fund a robust public service push.
The Story Being Sold
Ruthe’s headline is “Fixing the foundations to deliver change.” Behind it lies a narrative that the UK needs a hefty boost in public investment to hit net‑zero, ignite sustained growth, and keep essential services afloat. Higher taxes, they say, are the price of living out that dream.
One Year Versus the Long Haul
It’s important to note that this is a single‑year spending round. While the Budget is pushing for bold investment moves, there remains a balancing act ahead: non‑ring‑fenced areas, where spending pressures could flare up, need addressing in future budgets.
Growth‑First: A Pro‑Growth Perspective
For anyone who’s advocated a pro‑growth strategy, this Budget’s promise to ramp up investment feels like a win. The tricky part? Checking the fine print to see how serious the commitment is. The targeted area? Green infrastructure and cutting those pesky high energy bills.
Private‑Sector Incentives & Funding Gaps
The plan acknowledges the need to spur private investment. The government’s challenge is to close major funding gaps—especially the lack of long‑term patient capital and assistance for small and medium‑sized businesses. It’s a crucial pivot away from the old bad boy of short‑term borrowing.
Planning Reform on the Horizon
Notably, over half of the economists surveyed by the Financial Times in January cited “lack of planning reform” as a bottleneck for growth. Many—including myself—felt institutional change was a must. Together with the Budget, we expect some serious planning reforms to roll out soon, a step toward unlocking the full growth potential of the UK.
The economic backdrop
UK’s Economy: Slowly Getting It Right
While the political chatter has been trying to paint Britain as “up in the air,” the numbers say not entirely. The International Monetary Fund (IMF) throws a bright light on our economic future, calling the UK the strongest performer among the four big Western European economies.
IMF’s Crystal Ball
- UK: 1.1% growth this year and 1.5% next year
- Germany: 0.0% this year, 0.8% next
- Italy: 0.7% this year, 0.8% next
- France: 1.1% each year
All of this in a world where global growth is ticking around 3.2% for both 2024 and 2025. On the silver side, a gentle lull in inflation could pave the way for interest rates to drop.
March Budget: OBR vs. the Rest
Back in March, the Office for Budget Responsibility (OBR) was already feeling the optimism. Their forecasts read:
- 2024: 0.8% growth
- 2025: 1.9% growth
Contrast that with other players:
- Bank of England: 0.2% growth for 2024
- Treasury’s independent forecasters: 0.4% 2024, 1.2% 2025
- Now, the independent crowd predicts 1.0% 2024 and 1.3% 2025
The OBR’s earlier bullish stance, coupled with expectations that rates might slide from 5% today toward a terminal 3.7% by next year, gives the Chancellor a bit of breathing room.
Impact of Public Investment
Strategic public investment isn’t a one‑day miracle. The OBR assumes that each 1% of GDP permanently added to public spend will lift growth by about 2% – but only after a decade or so.
Quick fiscal tightening, on the other hand, tends to dampen growth prospects in the short term.
In short: the UK economy is on a modest but steady up‑trend, and with the right mix of policy and patience, we might just see more than a gentle startmanship in the next few years.
The fiscal numbers
Why the Budget’s New Dance Moves Might Just Add a Pinch of Brain‑Food to UK Finance
Picture this: The economy is doing a little happy jig, but the government’s ledgers feel like a rainy day. It’s the classic case of “shady numbers behind the sunny headline.” Luckily, a clever pivot might give us a new rhythm.
From “Debt” to “Worth” – The Switch That Could Save £50 Billion
- Old school – Public Sector Net Debt (PSND): just liabilities.
- New school – Public Sector Net Worth (PSNW): assets + liabilities.
- Why the shift? The gov’s thinking public investment is like planting trees – you need to see the green, not just the cost.
- Once the balance sheet is “aware” of assets, the Chancellor could grab up to £50 billion of extra fiscal slack.
When You Build an Asset, You Still Have to Pay the Bill
Think of it as raising a puppy: you invest in it, but the fur—well, the cost—stays around. Higher borrowing means the government will need to issue more gilts, so investors must think the returns are worth the risk. The balance‑sheet approach doesn’t sidestep the “pay the deficit” dance; it just gives the room to do it credibly.
Rules on the Table – A Quick Re‑Codification
- Budget deficit <3 % of GDP.
- Debt share of income should shrink in 5 years.
- New possibility: a net worth target turning better over time.
Sea‑Level Look at the Numbers (2008‑style)
In September, the Office of National Statistics painted a picture that felt stuck in the 1960s: Public-sector net debt (excluding banks) at 98.5 % of GDP. Even punching the Bank of England out of the equation, it sits at 91.2 %.
Net worth deficit – That’s the difference between the government’s assets and liabilities. In September 2024, it was a staggering £731.3 billion – a whopping £128 billion more than a year earlier.
What This Means for Public Spending
Yes, the debate often swirls around “more spending,” but the power of PSNW is to push you toward smarter, not just bigger, investments. Still, for now it’s all about the weight of debt.
Taxation – The New Game Plan
Post‑March Budget data show median earners (no kids, no benefits) pay the lowest personal tax share ever for a 50‑year span, since the 1975 national insurance overhaul.
Looking ahead, the tax share is set to surge to 37.1 % by 2028/29 – a full four percent bump over pre‑pandemic levels. If the budget keeps tweaking, that figure could climb even higher.
Markets’ Expectations – A Calm Sea, Not a Storm
Finance markets have already set their compass: interest rates won’t skyrocket. With inflation staying leisurely, the forecast? Thinking rates will ease quite a bit.
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