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Next week's autumn budget could have a drastic impact on UK businesses and the pound.
The heady days of early July feel a long time ago. In the space of just a few months, Sir Keir Starmer’s Labour party has battled civil unrest, a row over winter fuel allowances and the gradual deterioration in public good will.
Next week’s budget is a prime opportunity to reset. Chancellor Rachel Reeves will unveil Labour’s most anticipated set piece yet. With public finances in a shaky place, could next week be the kind of catalyst business need to boost investment and kickstart growth again?
Relaxed spending rules
One of the key questions coming into the autumn budget was whether Labour would ease the Conservative’s stringent sovereign debt restrictions. We didn’t have to wait until the budget to find that out.
At the International Monetary Fund (IMF)/World Bank annual conference this week, Reeves confirmed that the treasury would look to unlock up to £57bn in additional spending. To do so, Reeves is thought to have decided on a simple accounting trick that allows her to include more government-owned assets in her calculations, thereby artificially allowing for higher spending.
Reeves was clear that some sort of pivot was coming. “It is time that the Treasury moved on from just counting the costs of investments to recognising the benefits too”, she said in a speech this week. While we have to wait for the precise details on this, businesses can expect a more active government in infrastructure projects and key industries, like semi-conductors and renewable energy.
The most frequent rebuttal against this plan is its potential impact on inflation. Businesses with outstanding credit fear that higher government spending could make it harder to borrow and therefore to grow. We will have to wait until the budget arrives to analyse these claims in depth.
Employer contributions
One of the most controversial measures Reeves is mulling is an increase to employer national insurance contributions. Keir Starmer has repeatedly said he will not raise taxes on “working people” but given the government’s commitment to balancing day-to-day spending requirements, taxes will have to be increased somehow.
That’s why many believe employers could soon be on the hook for higher taxes. The likeliest place for this would be in national insurance, where fresh taxation could help to reduce NHS backlogs and longstanding issues over staff pay.
Any increase to business taxation would have to be weighed carefully against its impact. Given the fragility of the economic situation, even a small change to costs will inevitably result in a significant financial strain for a large number of businesses.
British corporates have proven remarkably resilient to the long parade of shocks they have faced in the past few years. Despite this, Starmer and Reeves are aware that there is a breaking point. The key question is how far they can go without reaching it.
Eyes on sterling
The pound has seen volatility ahead of the landmark occasion. As the days tick by, financial markets will be watching closely for clues as to Labour’s direction and how this might affect the economy at large.
Businesses would be wise to get out ahead of any sterling weakness. As ever, Smart Currency Business is here to help will all your treasury management requirements. We can help devise a comprehensive hedging strategy to mitigate risk and we can also help implement and hone those processes on an ongoing basis.
Speak to the experts today to see how you can protect your budget from currency risk. Call 020 7898 0500 to discuss a forward contract; alternatively, if you’re new, please register with Smart Currency Business today.
