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The UK economy faced choppy waters throughout much of 2023, where GDP suggested a mild recession – before growth returned in the start of 2024. The economy then grew relatively sharply, including lower inflation and rises in average wages rising higher than price rises (which is often a strong indicator of a good economy).
The Bank of England predicted that inflation will soon drop below the 2% target. At the same time, however, public debt was significantly higher than planned for. The government borrowed almost £80 billion since the start of the fiscal year, in contrast with the OBR’s forecast of £73 billion.
Following the Labour election win under Keir Starmer, many voters (and businesses) watched on eagerly to see what changes would be made to fiscal policy. Traditionally, Labour have been seen as the most likely candidates to raise taxes significantly.
Their election promises were heavily based on the idea of increased public spending in areas like the NHS, despite the fact that Chancellor Rachel Reeves has reportedly identified a pre-existing ‘black hole’ of debt left over from the Conservative government – of around £22 billion. It was therefore inevitable that the budget would lead to some tax increases.
The budget promises much higher public spending in a number of areas. The OBR has called it ‘one of the largest fiscal loosenings of any fiscal event in recent decades’.
Tax hikes were also notably present. The changes proposed are supposedly going to raise £36.2 billion a year in additional revenue for HMRC. A list of key changes are outlined below (though not exhaustive, by any means):
The main concern for the average employee has been any suggestion that income tax would go up. It has not, in line with Labour’s promise not to tax ‘working people’ more (directly) via this budget.
In practice, however, it might be more accurate to say that the budget will not be increasing tax on ‘work’ itself (a more specific definition), since ‘working people’ may (arguably, as Starmer has faced numerous questions on in the last few days) still hold assets which are going to be taxed more heavily . For example decently sized pension funds will now be subject to inheritance tax.
Even then, though, it can be argued that these business-focused tax increases will still inevitably end up hitting the pockets of employees. This is since businesses facing the increased burden may well attempt to pass on these losses through employee salaries, to some extent (though there are complex tax and legal rules in play here). Higher taxes based on your number of employees might also make you reconsider exactly how many jobs you are hiring for, too. This leads to even more concern amongst job-seekers – such as recent university graduates – who are already facing a very narrow, competitive job market.
Businesses themselves have been widely critical of the increases to national insurance contributions which they are being asked for – essentially, this makes employing staff a lot more expensive. To give a recent example, high street retailer Primark’s owner ABF have said that their wage bill is likely to increase by ‘the tens of millions’ as a direct result of the budget.
They ruled out speculation that this would be passed onto consumers (leading to even more pressure on the pockets of working people, especially in a relatively budget-friendly environment such as Primark). However, they did suggest in a recent interview that the changes might lead to them focusing more time and money on their overseas operations (taking the view that the opportunity for growth in the UK is being stifled by the budget – something the Conservatives have been widely arguing on from the opposition benches).
According to a very recent statistical study, two thirds of business leaders feel that the budget will have a negative effect on their operations. Of course, voters need to weigh this up against considerations like greater funding for public services (which the Conservatives were widely criticised for cutting in the light of lower taxation).
Aspiring lawyers at all levels need to understand this story. Whether you are a solicitor at a high street law firm (advising local private limited companies with a handful of employees) or a Magic Circle / elite US law firm (advising some of the biggest companies in the world in complex cross-border arrangements), the Budget has a huge effect on anyone that does business in the UK. Indeed, it affects all individuals in the UK, too – though they may be likely to turn to less formal tax advisors than legal professionals for advice.
In terms of commercial awareness (a key skill which law firms and chambers are always on the lookout for at interview, and even in the early application stage), the Budget is one of very few stories that honestly appears a ‘must know’ topic for candidates (at least at a baseline level) due to its wide-reaching consequences.
An excellent starting point might be looking at the client list of your target firm and trying to predict how such major changes to the UK’s fiscal policy are likely to affect them, both legally and in a broader ‘business’ sense (as we have done above briefly in the context of Primark, to give just one example).
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