Host

Philippa Lamb

Guests

• Iain Wright, Managing Director, Reputation and Influence, ICAEW
• Frances Haque, Chief Economist, Santander UK
• David Williamson, Political Editor, Sunday Express

Transcript

Philippa Lamb: Hello and welcome to the Budget episode of Accountancy Insights. We’re recording this about 24 hours after the Chancellor stood up, and as you will all know already, there is plenty to talk about. I’m Philippa Lamb, and here to dissect Rachel Reeves’ first and long-awaited Budget, I’m joined by our series SWAT team: Ian Wright, ICAEW Managing Director of Reputation and Influence; Frances Haque, Chief Economist at Santander UK; and David Williamson, Political Editor at the Sunday Express.

Hello everyone. Thanks for being with us. I know how busy you all are right now.

As I said, there was a lot in the Budget. For this podcast, obviously we’re going to focus on the announcements of most interest to business and accountancy. We’re going to put our minds to what the Budget as a whole could mean for the wider economy and UK PLC. But David, I’ve got to ask you first: you were there – what was the mood like in the chamber?

David Williamson: A genuine sense of occasion, because they’ve been away on recess for so much of the time, and obviously the election and everything. It’s still a novelty to walk in and see the Conservatives on the left-hand side of the Speaker, certainly, and this blaze of people dressed very colourfully in Labour at the moment on the right-hand side. And of course, there aren’t enough seats on the green benches for them all. And suddenly… it’s still a novelty to have Prime Minister’s Questions, but this is the Budget moment, and to see the first woman Chancellor in history standing there, this is one for the history books. But also looking onto the Tory benches, you see so many of the leadership candidates there, and this sense of: this is what it means to be out of power. And unlike perhaps some Budgets in the New Labour era, here is one where you can see on their faces, thinking: this, we got into politics to stop this type of thing.

PL: Yes, it was dramatic. I watched the whole thing on television, and it really felt dramatic, didn’t it?

Frances Haque: It did, it did.

PL: Moving to the Budget itself. Headline, first impressions – what did you think, Frances?

FH: To be honest, I was slightly disappointed. I mean, obviously there was investment, but it’s very front loaded. It wasn’t in quite the areas that I thought it might be, which was more on things like life sciences. Having said that, there was a good amount of investment around transport. So on the whole, it was positive, but there were things that I think were missing, and perhaps we can get to those later.

PL: Iain?

Iain Wright: I thought it was big and bold. I was genuinely surprised at the scale. I thought it was quite a simple Budget, in order to explain. This was big primary colours, I think a lot of the heavy lifting will be borne by businesses.

PL: That’s the key thing, isn’t it? Before we just get to that… David, your over-arching impression?

DW: It is a historic change of gear and direction. Any last dream amongst the remaining Brexiteers that still have a seat in the House of Commons that the UK post-Brexit was en route to becoming Singapore off the Channel has gone.

PL: But, Iain, the Chancellor clearly sees investment as a cure for all ills. She’s trying to create this economic stability, isn’t she, to underpin that? But as you say, she is looking to business to carry a lot of the burden, and the NI contribution – the employer’s NI contribution – is the big one.

IW: I think you’ve summed it up. As I said, I think it’s one of the most straightforward Budgets of my adult lifetime. I think it’s one of the biggest budgets of my adult lifetime. I think it’s a marked change in economic and fiscal policy. So more spending – something to the tune of £70 billion every year until 2030, about half of that paid for by taxes and about half of it by borrowing. We’re going to take more in tax take as a proportion of GDP than we ever have in our country’s history. It’s astonishing. And the bulk of that tax increase is going to be by essentially one single measure, and that’s the National Insurance contributions from employers.

So you can explain it really easily, and that spending is going front-ended, I think, as Francis said, on public sector investment – about two-thirds of it on day-to-day spend, and about a third on capital spend, most of it going to the Health Service, a bit on education, to some extent on defence. But this is big and bold, as I said.

PL: There has been a lot of talk, a big response from business, about those National Insurance contributions, hasn’t there? Obviously the money’s got to come from somewhere – that’s where it’s coming from. What do we feel the implication is going to be? We’ve heard a lot about it depressing wage growth, we’ve heard about compressing hours, employers won’t be able to afford to employ as many or as long as they do now. What do we think?

FH: I do think it will have implications. It could go one of two ways: it could go come off wages, so you get less wage growth, or of course they could be looking to put up prices, and so it’s consumers… I mean, ultimately it’s workers, because you’re either working or you’re consuming and you do both, so in that respect it’s the same, but obviously it has slightly different consequences for things like inflation, of course. But at the end of the day, it was quite it was quite a hit. Certainly from a forecasting perspective, the 1.2, that was kind of around what we thought it might be. But the threshold change, I think, is probably the one that actually was a surprise, although of course SMEs at least had an increase in their allowance, so at least from their perspective, hopefully for the really small ones that will help. But yes, that’s a big change.

PL: The threshold came down to £5,000 didn’t it? But the employment allowance, that went up to £10,500. Is it enough? Is it really going to soften the blow?

DW: The IFS have been sounding the alarm as well, saying that actually the amount that this is going to generate could be radically less because of that suppression. Because if people are actually generating less through income tax, if their wages are being suppressed, there could be a black hole of Rachel Reeves’s own to try and fill.

PL: It’s a long-term play, isn’t it, but if you take it in tandem with the rise in the National Living Wage and the plans to strengthen workers’ rights… Iain, what do you think that will do to the investment scenario going forward?

IW: It’s a very Labour Budget. It’s about public spending. It’s about investment in public services with a particular slant on the NHS. It’s about trying to give the lowest paid a bit of a wage increase, a rise in minimum wage, that sort of thing. So in that regard, you can see it’s unashamedly a traditional Labour Budget. In terms of what impact it will have on growth, what decisions businesses will make – will they hold off investment? Will they take on as many workers? Will the trajectory of pay increases increase at a level which we’d all like, to have real living standards rising? Those are the big issues.

There’s another big macro factor, Philippa, to mention – the OBR is very strong on it – which is because we’ve not seen this level of public sector investment for quite some time, what will happen – there’s a potential risk that it will crowd out private sector investment, so the growth trajectory will be less than what was originally planned. So that’s going to have an impact again, on productivity, on living standards and on the growth of the economy. So those are big risks.

PL: That crowding out point has been much discussed this morning, hasn’t it? As you said, the intentions are laudable. They’re trying to hit this sweet spot, aren’t they, between supporting business and worker? But what do we think about the crowding out point?

FH: I think it’s a fair point that if you’re putting it all now, that that is going to have an effect. And of course, that’s on top of additional costs. And of course, possibly… if you look to the OBR report, it obviously talked about inflation being slightly higher, which obviously would have an impact, possibly on how quickly interest rates fall. And obviously that then has another implication, because to invest you generally borrow, and therefore borrowing costs are also higher. So there are lots of different parts moving to answer that question, but yes, I think there is that possibility of crowding out.

PL: Yes, it’s a delicate balancing act, isn’t it? I mean, positively, she highlighted various key sectors for growth, didn’t she, including automotive, aerospace, bioscience.

DW: The big question though about… These are great ambitions to be one of the fastest growing countries. The question is, while the idea of switching to a net-zero economy is something which everybody pretty much, with only a handful of exceptions, says it’s something that we need to do, the question is whether that actually leads to genuine growth, or whether we’re simply actually producing what we need, but in a different way. Where is actually the big boon to the economy of doing new things?

That’s the question which is, I suppose, hanging over this. Where is the great excitement that’s going to be bringing entrepreneurs to this country? I don’t think… it may be capital gains tax, and such things. There’s lots of things that just lower the temperature a little. Now, that’s not going to put off somebody from doing something amazing, if our universities over the next five years manage to steal a march on Stanford. But it’s how does that happen? Or are we just simply trying to keep our public services from collapsing? And is that the main role of government at the moment? In which case that’s a real luring of national ambition.

PL: Yes. She was trying to stimulate this appetite for risk, wasn’t she, and investment? And when we had the big investment summit only a few weeks ago, that all looked quite positive. What do you think, Iain? If you’re thinking about inward investors, how do you think this will be received over overseas by people who would potentially be investing here?

IW: I think David talks a lot of sense about, does it change the mood music, that sort of sentiment and rhetoric on capital gains. But also what struck me is, inherent within the figures that the Chancellor produced yesterday was a sense of this is a 10-year plan. I think she mentioned at the dispatch box, ‘a decade of national renewal’, which has been a phrase used by the Prime Minister and now the Chancellor. This wasn’t for this Parliament. This is for a 10-year period. And I think if you’re a long-term investor, if you’re thinking in some of the priority sectors that the industrial strategy will be dealing with – life sciences – where should I research and manufacture the next generation of cancer drugs? Or, where do I do research on Alzheimer’s? You want to do it here. And I think that decade of national renewal and that sense of 10 years’ stability, I think that might be attractive. Equally, the investment that we saw – the targeted, focused investment on the automotive sector – that shows where the industrial strategy is going.

PL: As you say, we’ve got the biggest life sciences campus in Europe, haven’t we, so that’s not going away anytime soon? And we did see better news, didn’t we, for business with the corporate tax road map, setting out this 25% cap on corporation tax?

IW: We have, and we called for that in our letter to the Chancellor, Philippa. We thought, in order to try and provide some degree of stability and some sense of what’s the journey, so that businesses can plan, we do need that road map. So we were very pleased to see that.

PL: Capital gains tax thoughts? We’ve briefly alluded to it – it’s significant, not significant?

FH: There was quite a lot of talk about where it was going to land. It started off on property, that actually didn’t move, so that was interesting. And then it’s just higher rate on both lower and higher – the rates have gone up. It’s very difficult to know with capital gains tax what will happen, because it is driven by behaviours, and it’s very difficult really… and this is why the Treasury doesn’t particularly like going after these sorts of things… because it’s very difficult to model what the benefit actually is. So I think the jury is probably going to be out on that one for a while.

The one interesting thing that was in the OBR report was… obviously they talk about whether they’re going to meet the fiscal rules and the headroom and all the rest of it. But what they did say, if you read the finer print, and I have read pretty much the entire document…

PL: We expect nothing less of you, Frances.

FH: Thank you. Which is to say that it was a kind of 50/50 chance as to whether this will be met, because there are so many moving parts. And part of that is because it’s very difficult with these smaller taxes that have real behavioural consequences to know how much you’re going to bring in. I thought that was quite an interesting point from the OBR.

PL: David, you’re nodding?

DW: There’s a lot of expectations that something is going to come up. One of the things that the IFS were pointing out was the day-to-day spending is so front-loaded, but does anybody actually think that the year after next we’ll be able to get by on, I think it was 1.3% increase in spending? There’s a great sense that the great national sofa is going to be turned upside down again in the hope that more loose change can be found. Where on earth is that going to be coming from?

PL: Thinking about investment for the long term, farmers are definitely not happy. This £1 million pound inheritance tax relief limit, in a sector where that’s pretty much the model, isn’t it – the national model, handed down and the money stays in the business.

FH: And they’ve had a hard time obviously with climate and things like that of late. So I’m fairly sure on the back of that it’s not welcome.

DW: Exactly. And we saw a little of how you can step on a lurking viper with the winter fuel payments. This actually has the potential to do that, because while there may not be, perhaps, great sympathy for people who are land banking and such things – which I think is what Rachel is primarily targeting – the potential for emotive stories of people who have had land for 10 generations, who especially if it’s primarily grazing land so you’ve great beautiful swathes of it but it hasn’t been bringing in money for a long time and they’ve been hanging on by their fingertips – this could actually become a very emotive story, which you’ll see running for a very long time.

PL: And at odds with a national move towards greater financial security.

DW: Yes, that’s very true, and also one thing I already picked up on this morning was that the narrative is being put forward that Labour are making people who wouldn’t be natural Labour voters perhaps shoulder this. For example, pensioners being the one group that was still holding out for Rishi and most of the polls at the end, and again, farmers. And this is quite difficult, because Labour actually did a very good job during the election of reaching out to rural communities, and they actually delivered incredible results. You see areas of the country which you just always assumed would be blue, possibly fading into yellow, turning red. People like Steve Reed, the Environment Secretary, have done an amazing job of outreach, and this is not how you then follow something up just over 100 days later if you want to keep those communities happy.

PL: Iain, business rate?

IW: There wasn’t a huge amount in there really. As I said, I thought it was a big, bold, primary colours Budget. There was some degree of local government settlement, but I still think… it gives a bit of a starting gun for reform, but I think more needs to be done to provide greater stability.

PL: So this was about continuing to support the high street, wasn’t it? The idea of the existing relief continues, but it is going to diminish, isn’t it?

IW: Touching to some extent upon what Frances said earlier, the business rates regime does need change, and there are perverse implications that alter behaviour. You are penalised if you want to grow. If you want to invest, your business rates bill goes up. We’ve got to deal with that. ICAEW has been very strong on that for a long period of time. That is acting as a real barrier to growth and needs fundamental reform.

PL: So what would you like to see?

IW: We’d like to see some more incentive to invest. That if you’re going to try and improve the productivity of your business – putting new kit into your factory, putting in an AI system that enhances the efficiency and may enhance customer service – that you’re not going to be penalised by an additional tax bill. That you’re given credit for trying to improve the productivity of this country.

 

PL: Talking about investing, the full expensing was good news.

IW: And hopefully we never hear from that again. That’s what business wants. That’s the key thing about these annual fiscal events. Of course, government has to say this is how we will raise money through taxation, and this is how we’ll spend it through public services, but tinkering is bad for business. So if we never hear about capital allowances and full expensing again, that is really a good, strong move for long-term growth and stability in this country and its economy.

PL: Frances, backtracking a bit. The Chancellor changed the rules around debt and spending, and everything she did rests on that. There’s been a lot of coverage about this. Just run us through your take on how significant that is.

FH: You want your listeners to fall asleep, then.

PL: Well, just briefly, I was thinking.

FH: Very briefly. She wanted to obviously change the rule in order to give her more headroom so she could borrow, and borrow she certainly did. But in terms of – just very, very briefly – in terms of the measure, the measure was just broader. It brings more assets and it brings more liabilities in, and for this in particular the assets outstrip the liabilities, which give you the bigger headroom, which then means that she can borrow more.

Obviously there is an issue with borrowing more, in the sense that – and you’ll have seen the markets reacted slightly negatively, I would say, in terms…

PL: Bond market…

FH: Bond market jitters. And obviously you can borrow more, but you do actually have to pay that back. So on the one hand, a lot was talked about the headroom, and you can understand it because you do want to invest. That was one of the positives of the Budget – ‘Invest, invest, invest,’ was pretty much the first thing she said when she got up. So from that point of view, it makes sense.

The other thing I would also say on that actually, she’s also putting some guard rails around it. We can talk about those in a minute maybe. But in terms of the actual headroom, that’s what she was looking for, and that’s why we had a change in the debt roll. Now it’s not unusual for fiscal rules to change. In fact, they were changed back in 2022, so it’s more the credibility behind it.

PL: But the guardrails do matter, don’t they?

FH: I think they do. And I think she’s very aware that what the market thinks really does matter. And it does, because it’s going to increase the cost of borrowing, and if you want to borrow more you obviously want that to be as small as possible. So it was interesting that she did mention those specifically in her speech to perhaps try and calm the market. I’m not sure if it worked this time around, but I think as they go around doing the business, then hopefully markets will actually have a bit more confidence for possibly the next Budget.

PL: We certainly didn’t see any sort of dramatic response from the market, did we?

FH: No, well, I think it was all well trialled really, to be fair.

PL: Very much so. Certainly with the IMF, who’ve been very positive about a lot of this subsequently. I mean, what’s your feeling, David, about the over-arching response to it from the various interested parties? How’s it gone down?

DW: Interestingly, the Labour Party actually seem incredibly happy, rank and file MPs. I don’t know whether this was just because they knew that journalists would be standing outside the meeting of the Parliamentary Labour Party last night, but they like banging tables. They like cheering and yes, they were doing this very, very loudly. There’s a great sense of wow, here we are in power, doing things and fixing things.

PL: Well, it was a long wait, wasn’t it?

FH: Fifteen years.

DW: A decade and a half, and it’s extraordinary to think of children who’ll be doing their GCSEs – their entire lives have been under Conservative government. This was just a bold reminder. There’s also such great contrast with 1997 and the early years of New Labour where a lot of Conservative MPs would privately say, Tony Blair, he’s really the best Conservative leader you could possibly hope for. That isn’t happening this time.

What is different… two things are different. One is that the leadership contest has allowed the party not to succumb just to despair, but they’ve enjoyed a good contest with lots of lively figures who have certainly captured the imagination. But the other thing is that they’ve been reminded that actually they still do have a unique selling point in a very crowded, democratic market, and this Budget will have shown them, and they’re like, well, I guess I can go and knock doors this weekend saying Labour is going to suppress your wages, and if you’re buying a house, selling a house… all these things. There’s a lot of things which are actually quite retail-ish, which is cut down to everyday experiences. So it’s going to be a very, very much a hard-fought battle over the next five years, I think, for the love of the country.

PL: Iain, ICAEW, generally what’s the feeling about this Budget?

IW: I don’t want to resort to clichés, Philippa, but the devil will be in the detail – little commas and subclauses of sentences that could have profound impact, and we’ll be interrogating that. We are doing so now. But the original response that I said to you at the start of this, which is, it’s big, it’s bold, it’s surprisingly big and bold, but it’s all of the heavy lifting borne by businesses, and how that is dealt with in order to have the primary objective of growth, that will be the story of this Parliament.

PL: Should we just look ahead briefly to close this off? Frances, there were high hopes of another base rate cut soon. What are you thinking?

FH: Well, I do think that we should get one in November, and I think that was sort of pencilled in. The one in December that has been discussed since inflation came in below what everyone was expecting a few weeks ago, I suspect that is now off the table. I think the measures we’ve seen, which will be inflationary, tend to suggest it’ll be more slow, steady progress. But that’s what most forecasters were expecting anyway, so perhaps that doesn’t change the mood too much.

The only thing I would say is it’ll be interesting to see whether the forecasters’ growth assumptions will change, given that there’s obviously a bit more front-loading, whether others will agree with the OBR that things should increase in the near-term. And the reason, just going back to why I was a bit disappointed, it’s because growth doesn’t seem to have grown in the longer term, so at least over the five-year forecast period. Now I fully accept that a lot of these investments won’t really come to fruition until towards the end of maybe even 10 years, but – and the OBR, to be fair, have obviously acknowledged that – but you do get that feeling that was a bit of a missed opportunity there.

PL: Okay. David?

DW: There’s so much money going into the NHS in particular, and Wes Streeting has been absolutely on the front foot as Health Secretary in promising reform. He’s been talking about how they’ve been looking at Formula One teams and how they can do the precision work there, and the pit stops, and comparing that to what he wants to be seen around surgeries and things. There’s high, high hopes, but you are having to try and reform one of the world’s largest state organisations…

PL: And it is tied to productivity wins, isn’t it?

DW: It is, absolutely, and pushing people who are still on the verge of exhaustion and are dealing with a permanent crisis situation across great swathes of it to become more productive is going to be an almighty challenge, especially when we’ve seen such confrontations with unions over recent times. And as any Labour chancellor or prime minister from the past can say, there’s no guarantee that they’re going to be any friendlier and amenable.

But there’s also the question of… to just try and get that growth kick started. There’s all the expectations of, well, is planning reform actually going to happen in a Big Bang way? Does the government have the confidence to do that? And there’s so much, so many other areas, such as trade – are we going to see a justification now for something big on relations with Europe that’s going to be a political fight that, again, will give Reform and Conservative MPs the sense of, oh, we may be in opposition but we have an actual purpose being here.

There are so many primarily political challenges while they’re still facing this absolute gargantuan task of trying to balance the public finances. It’d be fascinating to see the private discussions of the Chancellor and the Prime Minister.

PL: Yes, it’s going to be lively, isn’t it?

Iain, last time you were on the podcast, you talked about Business Confidence, the ICAEW monitor, sliding. Where do you see it going now?

IW: I said it was declining, I’m not sure I said sliding.

PL: I beg your pardon: declining.

IW: And it’s coming off quite a historic high. If I just talk very quickly, Philippa. We’ve done this over 20 years as a Business Confidence Monitor, and the average is a figure of +5. The last quarter was 14.4, which gives an idea that confidence is high. It’s come down a bit, largely I think because there’s push and pull factors. Businesses, I think, were thinking, do you know what, this was on the verge of a general election, we think we know the results of the general election, we think there’s going to be a large majority – that gives some degree of stability.

I think where the confidence has declined slightly is because of the long wait for the Budget. And this is really unusual for British politics. A new government tends to have a first Budget relatively quickly, so confidence declined as a result of that. I suspect, though, because business is meant to bear the brunt of a lot of this Budget, confidence might fall further.

PL: The next big event – talk about another one – is the US election next week. Is that going to be another reason why business will just watch and wait on the investment front for a bit, do you think, whatever the outcome?

FH: Well, yes, there is that worry. There’s an awful lot of instability out there. But I think for businesses, at some point you’ve got to say, well, I’ve got to work past this, because otherwise I’m just putting off and putting off and putting off for the right moment. Well, the right moment may never quite come. I suspect they may wait at least until they know which direction the US election ends up going, but that obviously is not long now.

PL: No, not long at all. Yes, Iain?

IW: I personally think next week’s results too close to call. I wouldn’t put any money on it, because it looks like it could be just a toss-up in terms of wafer-thin majorities, both in the popular vote and the Electoral College.

PL: But for business, it’s very significant, isn’t it, which way it goes?

IW: Absolutely. But you know what? Just building on what Francis has said, I think we’ve lived from 2008 on that ‘I don’t know where the world’s going’. I think declining productivity, uncertainty, since the global financial crash, has meant investment is being put off and put off. And I think that might continue still.

PL: Do you?

IW: Because it’s like, where, what… what is the future shape of US economic policy? How does that fit in with Ukraine, and energy prices and supply chains? We haven’t mentioned the Middle East. All these uncertainties, and then the big forces of – and I think David mentioned, how do I transition to a net zero for my business and my supply chain? What do I do about technology. How do I incorporate AI into my business? – these big things. And I think businesses are saying, can we just wait and see? Let’s just see what happens. And they’ve done that since 2008.

PL: As Francis says, can they do this forever? Because isn’t this the new normal?

DW: That’s the great terror, that – and people like Kemi Badenoch have been putting that forward – are we essentially, Western democracies, very large pension funds and health services with a small state attached to it, trying to prop it all up. Meanwhile, on the other side of the world, you have alternative models of government, which are suddenly, for a lot of the countries in between, which model looks more attractive? Chinese stability or permanent chaos across the Atlantic?

PL: Yes, it’s a tough environment for business and investment, isn’t it? I think we can all agree on that –very little certainty.

FH: Yes.

PL: Frances, Iain, David, thank you very much indeed. Fascinating stuff – really, really useful to hear, and just straight off the back of the Budget is great.

You’ll be back with us before Christmas, I’m delighted to say. We’re going to be looking back at the year as we always do, and I’ll be calling on you for predictions for 2025, which is a testing thing for all of you. Feeling confident?

FH: Maybe!

IW: Woah, I wouldn’t go that far.

PL: Well, I’m looking forward to it. Accountancy Insights will return in early November. Before then, Behind the Numbers will be digging into the delays to local authority audited accounts as the government’s first backstop date looms large. Make sure you catch that one.

A final reminder: these podcasts count towards your CPD. Make sure you log your listening and submit it as part of your CPD record. If you listen on the website rather than your phone app, it’s as simple as clicking the Add CPD button on each individual episode page.

Thanks for being with us today.