Leading Indicators | Budget Preview: What’s next for the UK?
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Labour’s fiscal rules
Chancellor Rachel Reeves will unveil her first budget tomorrow, alongside the latest Office for Budget Responsibility (OBR) forecasts. Reeves is expected to propose a combination of spending cuts, increased investment, and tax hikes. Since taking office in early July, Reeves and Prime Minister Keir Starmer have repeatedly highlighted the challenged state of the UK’s public finances as they stand.
Reeves has confirmed plans to adjust the UK's fiscal rules to fund c. £20 billion in additional investment per year through increased borrowing. She is also anticipated to adopt a new measure - ‘public sector net financial liabilities’ (PSNFL) - which accounts for financial assets such as student loans. This adjustment could allow Reeves to borrow up to an additional £50 billion annually by the end of the decade, while still have debt falling, under the Treasury’s forecasts.
What we know
What tax considerations can we anticipate from tomorrow’s budget?
Reeves has reaffirmed Labour’s manifesto pledge to not increase the burden on ‘working people’. However, with a £22 billion fiscal gap to address, other revenue-raising measures remain under consideration. These may include potential taxes on capital gains, dividends, inheritance, non-domiciled residents, and fuel.
In line with Labour's drive to stimulate growth, Starmer recently pledged at the UK’s International Investment Summit to ‘rip up’ regulations that hinder growth – a move aimed to support the construction of homes, warehouses, and data centres. As part of Labour’s broader initiative to boost foreign investment, more capital could find its way into commercial real estate ahead of the upcoming budget.
Changing dynamics
The broader context is that such budgets and policies lay the groundwork for long-term economic stability and growth. If Reeves' additional borrowing is directed toward growth-enhancing capital projects, such as improving Britain’s infrastructure, this could significantly bolster the UK economy’s long-term growth prospects.
Notably, in recent IMF projections, the UK saw the second-highest growth upgrade among G7 countries after the US, with GDP expected to grow by +1.1% this year—up from previous forecasts of +0.7%—and by +1.5% in 2025.
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