UK Autumn Budget 2024: FAI response

**This blog post will be updated throughout the day. Keep checking back throughout the afternoon and evening for more content and analysis.**

This was Rachel Reeves' first big budget and a major realignment of government priorities. Taxes have risen significantly since April, averaging £35 billion a year, but spending has risen even more, reaching an average of £70 billion. This means that lending increased by an average of more than £30 billion per year over the forecast period.

In the short term, the Chancellor's decision to borrow an additional £20 billion could boost spending this year to deal with the short-term pressures and public sector pay decisions highlighted in July. There has been a significant increase in capital expenditures in particular over the long term, and we will have to wait and see how much of that is delivered. Governments are notoriously difficult to smoothly spend large-scale step changes.

How does she add this up? It all has to do with changes in financial rules. If she had kept the default debt rules, she would have broken them by £6 billion. She also left less headroom for the current budget surplus than Jeremy Hunt, spending three-quarters of her newfound headroom on the debt bill. With so little room for maneuver, it's not at all clear that the Chancellor will meet these new rules if many of these highly uncertain revenue generators fail to bring in as much money as expected.

In Scotland, there has been a significant increase in spending, mainly through the Barnett formula, due to increased spending in devolved areas. Funding for day-to-day spending has increased by £1.5 billion this year, which is likely to make the Scottish Government's task of balancing the budget much easier. Barnett's result will be £3.4 billion next year, of which £2.8 billion is daily spend. The Treasury will also provide compensation for higher employee costs through the NIC Bill for public sector employers. It is understood this will be in addition to the £3.4 billion announced today.

Government spending as a percentage of the economy (GDP) is expected to increase slightly from 44.9% to 45.3% this year before easing slightly to 44.5% in 2029-30. This is 4.9 percentage points above pre-pandemic levels.

This initial increase is driven by additional funding for certain programs such as the Indemnity Scheme (Infected Blood and Post Office Horizon) and increased debt interest costs. The gradual decline over time reflects slower department budget growth and lower pension and student loan spending. Interest and welfare spending are expected to remain steady.

More than 80% of this high spending stems from the new government's decision to significantly increase budgets for departments, particularly routine expenditures (RDEL) and investment projects (CDEL). Spending was previously expected to decline slightly by 1% of GDP over the next few years, but the new changes will keep the department's budget roughly stable as a share of the economy.

A permanent increase in the size of the public sector is probably the most significant change delivered through this Budget.

Chart 1: Current revenue and public expenditure as a percentage of GDP

Source: Previous OBR* performance data for 2023-24 from the OBR Public Finance Database.

Meanwhile, total public sector revenues (government income – mainly taxes) are expected to rise to 40.5% of GDP in 2023-24, up 3.6% from pre-pandemic levels, and reach 42.4% in 2029-30. Among these, the 'tax collection rate' of national income is expected to reach its peak from 36.0% in 2023-24 to 38.3% in 2027-28, the highest ever and 5.2 percentage points higher than the pre-pandemic level, before stabilizing at about 38.2%. . %. This latest forecast for 2028-29 tax revenues is 1.1 percentage points higher than the March estimate.

One of our most requested outputs is always a table of whether an announcement applies to Scotland. This is what we know so far. Some details will be updated as we go along.

During his speech, the Chancellor announced that the budget would be implemented each fall. We hope that commitment means one financial event a year to stop hasty impulses.

The devolved administrations will be very happy to hear this. Their own budgets depend on decisions made in the UK budget, and moving key fiscal events to before the delegated budget is presented and scrutinized will give them more certainty and the ability to make and make meaningful plans. The increased time also improves congressional scrutiny overall and prevents distorted incentives when “March surprises” occur after the devolved administrations have already had to revise their budgets for the upcoming year.

Compared to the March forecast, total spending is on average £55 billion higher per year, increasing by around 9.1% over the forecast period.

In the latest budget, spending by the Resources Department is around £23 billion higher this year than expected in March 2024. This increases to an average of £44 billion over the next four years. Capital department spending will rise by an average of £20 billion over the next few years, a massive increase.

Chart 2: Actual departmental resource spending, 2007-08 – 2028-29

Source: OBR, HMT

Chart 3: Actual Departmental Capital Expenditures, 2007-08 – 2028-29

Source: OBR, HMT

If we take a closer look at how the government's spending plans are expected to change each year, it's clear that this approach is very advanced. Public services will receive significant funding in the short term. Daily funding for these services is expected to increase by 4.8% this year and by a further 3.1% in 2025-26. However, after these two years of growth, spending growth is expected to slow to 1.3% per year. It is clear that the focus is on addressing the backlog and immediate needs. But this also raises some questions. Will this short-term spending surge lead to tighter budgets?

Investment spending follows a similar pattern, rising significantly next year (up 9.8% in real terms), rising slightly more in 2026-27 (3.3%), before remaining stable thereafter. Nonetheless, it is worth bearing in mind that this would result in an average real annual growth rate of 2.6% between 2023-24 and 2028-29, compared to an average real annual decline of 1.1% in the March forecast.

The government's game plan appears to be to bring spending forward now and slow it down later. Big bet? These investments could spark sufficient economic growth over the next few years, giving the Prime Minister more flexibility.

Chart 4: Year-on-year change in daily* and capital** spending since March forecast.

Source: OBR, HMT

*Expenditure limits by resource department

** Spending limits per capital department

João is Fraser Deputy Director and Senior Knowledge Exchange Fellow at the Allander Institute. Previously, he was a senior fiscal analyst at the Office for Budget Responsibility, where he led analysis of the long-term sustainability of the UK's public finances and the impact of economic development and fiscal policy on the UK's medium-term outlook.

Mairi is the Fraser Director of the Allander Institute. Previously she was Deputy Director of the Scottish Finance Commission and National Accounts Officer for the Scottish Government and has over 10 years of experience in a variety of statistical and analytical fields.

Emma Congreve is a Senior Knowledge Exchange Fellow and Deputy Director at the Fraser of Allander Institute. Emma's work at the Institute focuses on policy analysis covering a wide range of areas of social and economic policy. Emma is an experienced economist, having previously served as Chief Economist at the Joseph Rowntree Foundation and Economic Advisor within the Scottish Government.

Ben is an economist at the Fraser of Allander Institute, working on a variety of projects. He holds a Master's degree in Economics from the University of Edinburgh and a degree in Economics from the University of Strathclyde.

His main areas of interest include economic policy, social care and criminal justice in Scotland. Ben also co-edited the Quarterly Economic Commentary and has experience designing and distributing business surveys.

Brodie is a Knowledge Exchange Assistant at the Fraser of AllanderInstitute. She recently graduated with a Master's degree in Applied Economics from the University of Strathclyde and holds a first-class honors degree in Economics and Politics from the University of Glasgow.

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