The long awaited UK Budget was finally announced today, after months of conjecture about what it would contain.
As an angry speaker of the House of Commons made clear on Monday, much of the Budget content had been briefed in the press in advance.
It could be argued that the pre-budget mood music coming from the government was extremely effective expectation management – the messaging had been of extremely difficult decisions and “tough choices”. There were undoubtedly some tough choices set out, in particular for employers, but the outcome, at least for the public finances, was extremely sizable increases in funding, and the “consequential” funding coming to the Scottish budget.
So what did this eagerly awaited Budget do?
The most eye-catching element in this budget was the large increases in public spending. The UK Government plans to increase spending by £70 billion per year over the next five years, with two-thirds of this going on resource or day-to-day spending, and one-third going on infrastructure.
Departmental spending plans (which includes the Scottish budget allocation) were only revealed for this year (2024-25) and next (2025-26). We will need to await the spending review, scheduled for spring 2025, to see the proposed departmental allocations for 2026-27 and beyond.
There were also large increases in tax, which, at £36 billion more per annum, fund just over half of the extra public spending. According to the OBR, these tax increases take tax as a share of GDP to 38% by the end of this decade – the highest level on record.
As well as the increases in spending and taxation, there were also large increases in borrowing, which will be £32 billion higher per annum over the forecast relative to the previous forecast in March. Borrowing will fund just under half of the extra funding announced. The impact of this is that net borrowing will fall more slowly than previously forecast by the OBR.
Again, as trailed, the self-imposed debt rules were changed. These are now for the current budget, or the difference between day-to-day spending and revenue, to be in surplus by 2029-30 (the OBR judges this will be met by £10 billion, small headroom by historical standards); and for net financial liabilities, or the difference between its financial liabilities and its financial assets, to be falling as a share of GDP by 2029-30 (the OBR judges this will be met by £16 billion, again, small by historical standards).
Taxation and other measures
By far the biggest tax raiser came from an increase to Employer National Insurance Contributions (NICs) which is expected to raise around £24 billion per annum. Employers will pay National Insurance at a rate of 15% on employees’ earnings above £5,000 per year from April 2025. This represents an increase in the current rate of 13.8% and a decrease in the threshold above which employer NICs are paid (down from £9,100 at present).
Some have claimed that this tax change breaks the Labour manifesto commitment to not raise taxes on “working people”. This debate will continue to rage, and formed the main line of attack from opposition leader, Rishi Sunak, in his final set-piece Commons event before handing over the leadership role this weekend. He argued that these increases in employers’ National Insurance will feed through to working people in lower wages, and may act as a break on employment and growth. The OBR noted “We assume that firms pass on most but not all of their higher tax costs to employees.”
The OBR also note that the Treasury will compensate public sector employers for the higher costs resulting from the NICs increase through increased budgets. For the UK as a whole, these costs are estimated to amount to over £5 billion per year.
There is potentially a disproportionate impact on the Scottish budget from increases in employer national insurance given that Scotland has a larger proportion of public sector employment. At the time of writing, we are still awaiting confirmation on how the Scottish budget will be compensated for this UK Government policy decision and what the level of compensation will be. The Scottish Government estimated that it would add £500 million to Scottish public sector costs.
The Chancellor announced that the minimum wage would increase to £12.24 an hour from April 2025 (an increase of 6.7%); the rate for 18-20 year-olds would increase from £8.60 to £10 per hour and the minimum wage for apprentices will rise from £6.40 to £7.55 per hour.
Despite speculation that the Chancellor would allow fuel duty to increase in line with inflation (which is the baseline assumption for the OBR forecasts), she instead announced that the freeze on fuel duty would be kept in place for another year at a cost to the Treasury of £3 billion.
Capital gains tax paid on profits from selling shares will increase to 24% and the freeze on inheritance tax thresholds will be extended beyond 2028 to 2030.
What does this Budget do for Scottish public spending?
The planned increase to capital spending is good news for Scotland’s Capital Budget, which had previously been projected to fall significantly, but will now rise by 7.1% in real terms next year.
On the Resource (or day-to-day spending on things like pay and delivery of public services), there were also big increases relative to what had previously been expected – the Resource budget this year is over £1.5 billion more than was set out in the pre-election UK Spring Budget 2024. This may make balancing this year’s budget easier than the Scottish Government previously thought and might negate the need for some of the ear-marked cuts for this year – for example, the drawing-down of SCOTWIND monies (see previous SPICe blog for details).
At the time of writing Barnett consequentials have yet to be confirmed by the Scottish Government, but the Budget document notes that an additional £3.4 billion will be added to the Scottish budgetary envelope next year. Details will be posted on the SPICe webpages when available.
Initial reaction from the Scottish Government was reasonably positive, with the Finance Secretary describing the UK budget as “a step in the right direction”, while cautioning that it still leaves “enormous cost pressures going forwards”. She also claimed that the additional funding for this financial year has already been factored into spending plans.
What happens next?
The ball now moves to the Scottish Government’s side of the tennis court, who now know the broad spending parameters for their own 2025-26 Budget (and the in-year funding position for 2024-25).
The outcome of the Scottish Government’s decisions will be set out on 4 December when the proposed Budget for 2025-26 is presented to the Scottish Parliament. That will commence a period of horse-trading between the political parties, as the minority government seeks the votes it requires to get its Budget agreed by Parliament.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit