A baseline of competence, but no answers yet
The charge levied at Prime Minister Andy Burnham and his chancellor in their first 100 days has been that this is a government of good vibes but no substance.
What perhaps this government understands, though, is that vibes matter. Economies are not wholly rational machines; they grow and shrink to some extent simply because of how people feel about them. And this budget will have made both the public and bondholders feel somewhat better simply because it was delivered with some competence.
The leaks were managed, the retail-politics giveaways were real and well targeted, and the basic view of international markets (that the UK is on a yellow card for fiscal competence but is behaving itself in the second half) remains intact.
Gilt yields fell modestly following the announcement, even as the Office for Budget Responsibility forecast a fall in economic growth in 2027 as higher rates and the cost of living take their toll on the UK economy.
The planned overall government spending envelopes remain tight, and it remains to be seen whether Burnham’s good vibes can survive a very tight spending environment as he approaches a general election. There is, as yet, no mechanism offered, for example, for meeting the additional £11 billion of defence spending annually that Healey has committed to. Problems are being deferred until the end of the parliament, and this is just the point at which governments like to be opening the purse strings to secure re-election. Things are just too tight to do much cutting now to prepare for that opportunity though.
The day of reckoning for this government remains the spending review due for 2027. Here the overarching picture of higher borrowing, higher borrowing costs, a historically high tax burden and a general mood of disappointment with the state of public services will really bite. Barring a remarkable improvement in economic growth this will remain a tough day for the government, which is delayed but not diminished by the sticking plaster provided by this budget. This review will be delivered, if we are to believe the OBR, in the context of quite weak in-year growth. Yes, it is forecasting accelerating growth from 2028 onwards, but this is of course predicated on the belief that the inflationary effects from the crisis in the Middle East will subside.
Ultimately, Burnham and Healey’s electoral chances of surviving that spending review revolve around the ability they show to deliver a scoreable uplift in economic growth in the years ahead.
Growth is the one condition that unlocks a better future. As long as the lower growth, lower productivity, lower growth in GDP per capita and stagnant real wages that have been in place since the financial crisis persist, things will certainly not feel better. As the Resolution Foundation highlighted, some 11 million people in the workforce today have never worked in a period of sustained rising real wages. The cultural impact of that is vast and it is only sustainable growth that can unlock it.
He does have a plan for this. He will hope that improving investor confidence in the UK relative to the debt basket cases of Europe like France will drive down our relative borrowing costs. Perhaps simply time passing since the mini-budget catastrophe helps.
He will also hope that a blizzard of devolution and deregulation, particularly in the building sector, can unleash productivity gains. There is certainly enormous scope here for a radical deregulation package that makes it much easier to build almost anything in the UK, but particularly data centres where he hopes to alleviate local opposition with neighbourhood investment plans.
His view that supporting second-tier cities to create good agglomeration gains will improve productivity is a reasonable thesis grounded in the solid literature. Some of this may come to pass as tax revenue is devolved. Again, this is a thesis with a solid grounding in the literature.
Perhaps in his most optimistic moments he also hopes the European Union will offer him some kind of dream package to boost growth; accepting for example free movement but with some kind of emergency brake, allowing entry to the single market with some form of the Thatcher rebate rekindled. A true optimist may argue that the growing need for collective European defence and AI security will provide the impetus for both sides to get the job done. However, you’d really have to be very high on those vibes to hold out much hope of this, given the virulence with which a vindicated European Union is pledging to stick to its red lines. So far the actual meaningful, forecastable growth uplift from deregulation and devolution remains just out of sight.
Yet, whilst all these problems persist, there is something of a national sigh of relief at watching us successfully get through a budget day without dropping any enormous clangers. Bank executives will be allowing themselves a sigh of relief at the lower-than-expected tariffs (finally some good pre-budget spin); the share prices are, after all, up on the day. And perhaps those helpful consumer giveaways will ease some of the despondency that stands to slow consumer spending as we head towards Christmas.
Key takeaways:
