Budget fails to address UK’s structural growth challenges

The Budget failed to address the UK’s long-term weaknesses in investment and a tax system that hampers growth, leaving the government set to be in a similar position next autumn, Rathbones, has warned. 

Oliver Jones, Head of Asset Allocation, said: “There was very little in this Budget to address some of the key structural causes of the UK’s tough fiscal situation. Some measures, especially the decision to impose national insurance on salary sacrifice pension contributions above £2,000 from 2029, are actively counterproductive. 

“There is a continued logical inconsistency in the government’s current approach to pensions. On the one hand, the reforms in its Pension Schemes Bill are rightly premised on the idea that the pension system has a vital role to play in supporting productive investment. More than half of small businesses that say they haven’t invested enough in the past three years cite a reason related to a lack of external financing, something the pension system is especially well-equipped to provide. And the government wants to drive more pension assets into productive assets in the UK.

“On the other hand, the changes announced today continue the trend towards tougher tax treatment of pensions, following the decision in the previous Budget that they will fall into the inheritance tax net from 2027. There is plenty of evidence that people respond to changes in the tax treatment of pensions when deciding how much to contribute. Changes like the ones announced today disincentivise contributions, limiting the pool of capital available to flow to where it is needed most for economic growth.

“The Chancellor’s tweaks to business taxation were also disappointing. Before the Budget we called for the expansion of full expensing (which allows firms to deduct investments from their profits before paying tax) to all forms of business investment. This would have provided a stronger incentive for firms to invest, and removed the arbitrary preferential treatment given to plant and machinery investment (which can already be fully expensed).

But there was no sign of that at all. Instead, the Chancellor effectively made changes in the opposite direction, raising revenue by reducing the generosity of capital allowances in net terms (via a reduction in the writing down allowance, only partly offset by a new first-year lease allowance).

“Finally, changes to business rates also failed to move the dial for investment significantly. Reduced rates for smaller retail, hospitality, and leisure properties, alongside higher rates for larger, high-value properties, shift the burden of the tax away from the high street and towards the likes of supermarkets and warehouses. And a temporary relief package will reduce pressures on some firms affected by revaluations. But the broader problem with the system, that it disincentivises investment in upgrading premises (as doing so increases the rental value used to calculate the tax), was not addressed.”