Growth Commission response to the Autumn 2024 Budget

The Growth Commission has issued the following reaction to Rachel Reeves’ Budget, delivered on 30th October 2024:

Last week the non-partisan group of leading international economists who form the Growth Commission published The Autumn 2024 Growth Budget, setting out how the government could boost GDP per capita by 27.1% over the next two decades.

Using bespoke economic models that take into account the dynamic impact of policy changes over time, we explained which measures would increase growth and which proposals the Chancellor needed to avoid.

Regrettably, in her Budget today, Rachel Reeves announced a number of measures which we calculate will hinder the prospects for growth as follows:

Raising IHT by eliminating business relief – this will raise £2.0bn in revenue, but will cause a hit to GDP per capita (as a percentage of annual GDP) of 0.0% in 2025/26, 0.2% in 2030/31, 0.4% in 2040/41 and 0.4% in 2045/46.

Raising CGT – this will raise £2.2bn in revenue, but will cause a hit to GDP per capita (as a percentage of annual GDP) of 0.0% in 2025/26, 0.1% in 2030/31, 0.4% in 2040/41 and 0.6% in 2045/46.

Rise in employers’ NI – this will raise £25.0bn in revenue, but will cause a hit to GDP per capita (as a percentage of annual GDP) of 0.2% in 2025/26, 2.0% in 2030/31, 1.9% in 2040/41 and 1.9% in 2045/46.

Alcohol and tobacco duty rises – this will raise £2.8bn in revenue, but will cause a hit to GDP per capita (as a percentage of annual GDP) of 0.0% in 2025/26, 0.2% in 2030/31, 0.1% in 2040/41 and 0.1% in 2045/46.

Business rates reform – this will raise £1.2bn in revenue, but will cause a hit to GDP per capita (as a percentage of annual GDP) of 0.0% in 2025/26, 0.1% in 2030/31, 0.1% in 2040/41 and 0.1% in 2045/46.

Raising the minimum wage by 6.7% – this will raise nothing directly in revenue, but will cause a hit to GDP per capita (as a percentage of annual GDP) of 0.0% in 2025/26, 0.3% in 2030/31, 0.4% in 2040/41 and 0.5% in 2045/46.

Raising tax on non-doms – this will raise £2.6bn in revenue, but will cause a hit to GDP per capita (as a percentage of annual GDP) of 0.2% in 2025/26, 0.5% in 2030/31, 0.5% in 2040/41 and 0.5% in 2045/46.

Combined, these measures will raise a total of £35.8bn in revenue, but will cause a hit to GDP per capita (as a percentage of annual GDP) of 0.4% in 2025/26, 3.4% in 2030/31, 3.8% in 2040/41 and 4.1% in 2045/46.

The annual impact on borrowing from reduced growth will be £6.7bn in 2025/26, £50.5bn in 2030/31, £56.5bn in 2040/41 and £61.2bn in 2045/46.

The net impact on borrowing will be £14.7bn in 2030/31, £20.8bn in 2040/41 and £25.4bn in 2045/46.

These changes will have a significant impact on the public finances. We calculate that while overall tax revenue may increase by a little over £35 billion in a full year, this will be more than offset by the requirement to borrow in excess of £50 billion a year by 2030/31 as a result of the hit to growth.

The overall hit to growth will be 3.4% in five years’ time.

Douglas McWilliams, the former Co-Chairman of the Growth Commission who was lead author of the Commission’s Autumn 2024 Growth Budget, said:

“The Budget is meant to boost growth but we have done the sums very carefully and frankly it doesn’t. We think in fact that there will be a hit on growth of 3.4% as a result of the changes announced, notably the rise in employers’ National Insurance contributions, the rise in the minimum wage and the changes to Capital Gains Tax, pensions, Inheritance Tax and the taxation of non-doms.

“Our calculations demonstrate how each of these policies will damage the economy. Labour’s planning reforms could boost growth, but it will all come down to the detail.

“The tax rises, along with increased borrowing, will pay for £50 billion of higher current spending and another £20 billion of increased capital spending. This is essentially a tax and spend budget, with both taxation and spending reaching record peacetime levels as a proportion of GDP.

“The bottom line overall is that less growth will mean an even bigger black hole to be filled in due course.”

Shanker Singham, Chairman of the Growth Commission, concluded:

“In the Growth Budget we published last week, we showed the new government which policy choices would satisfy their welcome objectives of economic growth and wealth creation. We also set out what they should not do.

“While we applaud their commitment to planning reform, it looks like the Chancellor’s Budget has implemented many of the items on our list of policies to avoid – and the consequent drag on the UK economy will be significant.

“GDP per capita growth is a priority for the British people as it increases household income and the regulatory reform that delivers it also lowers costs. Regrettably, we see the drags on the economy over the next twenty years in the Budget outweighing the wealth-creating proposals.”