Insight Investment

New fiscal mandate

The Labour government, led by Chancellor Rachel Reeves, has introduced a new fiscal mandate aiming to achieve a current budget surplus by 2029-2030 and maintain it thereafter. The fiscal framework now includes public sector net financial liabilities (PSNFL), significantly reducing the UK's debt-to-GDP ratio.

Budget overview

Labour's first budget since the election includes:

• A substantial increase in day-to-day spending, funded by higher taxes.
• A rise in public investment spending, expected to boost GDP and CPI inflation in the near term.

Key budget measures

• Increase in day-to-day spending: Funded by higher taxes, raising the tax burden to the highest level since 1950.
• Borrowing to invest: Public investment spending will increase from 1.7% of GDP to 2.5%, adding net stimulus relative to the old plans of around 1% of GDP.
• Pushing out improvements in debt/GDP: The change in fiscal rules created headroom for extra borrowing, with significant increases in tax designed to fund a revised path of public spending and investment.

Implications for UK growth

The budget is likely to boost growth in the near term due to higher government-led demand. However, the rise in national insurance for employers may negatively impact the outlook for UK labour markets.

Implications for the Bank of England

The budget measures are expected to boost GDP and CPI inflation, making it harder for the Monetary Policy Committee to deviate from its gradualist approach to interest rates.

Longer-term risks

The government has projected tight future spending plans to remain within its fiscal mandate, which could be politically challenging to implement and may result in large future deficits if the UK faces an unexpected economic downturn.