While much of the focus ahead of Rachel Reeves’s first Budget was on growth, in the event, tax rises and public spending plans to the tune of over £40 billion were announced. Taking stock of the various measures, Mike Brewer considers: what does the 2024 Budget mean for inequality in the UK?

The long-awaited Autumn Budget on 30 October was billed as the Government’s opportunity to set out its economic strategy.

With wealth gaps surging during the pandemic, and income inequality and poverty being forecast to remain high, if not rise, under the policies bequeathed to Labour by the previous Chancellor, what does Rachel Reeves’s first Budget mean for inequality?

The 2024 Budget: all about growth?

The first thing to note is that it would be hard to argue that inequality was the explicit focus of this Budget. The pre-Budget mood suggested the focus would be on growth, reflecting the Prime Minister’s and Chancellor’s emphasis on faster growth as the means to delivering improved public services and higher living standards. Indeed, we have long argued that, after 15 years of stagnant productivity and relative decline, Britain desperately needs economic growth. Without it, it will be impossible to raise the living standards of our country’s worst-off households – who are currently a fifth poorer than their counterparts in France – and achieve shared prosperity.

Growth was certainly key in the Budget, with the Chancellor arguing that it was not fiscally irresponsible to borrow to invest and topping up the previous Government’s investment plans by £100 billion over five years (although this merely prevents public investment from falling as a share of GDP, as had been planned by her predecessor, Jeremy Hunt).

But this was ultimately a public services Budget. The Chancellor essentially told the country that the plans for public services spending drawn up by Jeremy Hunt were unrealistic. Compared to those, Reeves announced increases in day-to-day public spending of £44.1 billion by 2029-30.

Growth was certainly key in the Budget… but this was ultimately a public services Budget, the Chancellor announcing increases in day-to-day public spending of £44.1 billion by 2029-30

To pay for this, the Budget contained tax rises worth £41 billion by 2029-30 (the largest on record), with the biggest contribution coming from changes to employer National Insurance contributions (NICs). In effect, the tax revenue foregone by Hunt’s cuts to employee NICs this year and last needed to be made up for in other ways.

The Prime Minister stated that “those with the broadest shoulders should bear the heaviest burdens” and the Budget implemented the manifesto commitments to abolish the non-dom status and raise taxes on “carried interest”. Additionally, VAT was applied to private school tuition fees, and capital gains and inheritance taxes increased (together with changes that reduce the unjustified ways in which different sorts of income or assets are taxed differently). While the above measures mainly impact the rich, there were also social security cuts. The Chancellor committed to broadly matching a money-saving reform to incapacity benefits announced by the previous government and confirmed the means-testing of the winter fuel allowance.

Assessing the overall impact of the Budget on inequality

It’s almost impossible to come up with an overall assessment of the Budget on household living standards and inequality: there were such a wide range of announcements and measures directly affecting households, businesses and government departments. For a distributional assessment of Budgets, we instead typically look just at changes in personal and indirect taxes directly affecting households and changes to social security benefits.

However, it would be misleading to ignore the rise in employer NICs when assessing this Budget. In the long run, there will be minimal (if any) difference in the economic impact of NICs increases charged to employers compared to NIC hikes applied to employees: in both cases, the wedge between what employers pay and what workers take home increases. It would be inconsistent, then, to show a cut in employee NICs as a benefit to households without also showing a rise in employer NICs as something that will eventually reduce household incomes (as employers offset higher taxes by reducing wages). The Treasury thought differently, and in its analysis of the Budget did not show the rise in employer NICs as having a direct impact on households.

And, after considering the combined impact of both direct and indirect changes to taxes, National Insurance and social security benefits, we concluded that this Budget will lead to falls in disposable income. Figure 1 shows the Resolution Foundation’s distributional analysis of all the key personal tax and benefit changes announced at the Budget. It shows that, as a proportion of income, these falls are broadly the same across the income distribution, with the richest households losing the most in cash terms.

Figure 1: Changes to regular tax and benefits announced at the 2024 Budget will have a negative effect on incomes across the distribution

However, if we also consider the qualitative impact of the measures that fall largely or exclusively on the rich, such as changes to carried interest and inheritance tax, and abolishing the non-dom regime, which cannot be modelled in the same distributional analysis, then it’s clear that the Prime Minister’s progressive aims for the Budget were achieved.

If we also consider the impact of the measures that fall largely or exclusively on the rich, then it’s clear that the Prime Minister’s progressive aims for the Budget were achieved

In the Treasury’s own analysis, it argued that we should also consider the impact of additional public services spending. To do this, Treasury economists had to decide how much a given £1 billion of public spending (say) benefits households – and it is this part that is contentious. Using data on how different sections of society tend to use public services, the Treasury’s view is that the additional spending is strongly redistributive, worth over 2.5 per cent of disposable income to the bottom three deciles of the population, and less than 0.5 per cent of disposable income to those at the top.

One can argue with the numbers, but the Treasury’s position has logic. If a government raises taxes for public services, then saying that the first change makes people worse off and the second doesn’t affect them is painting a partial picture. And it is well established that day-to-day public services are generally redistributive, which is why the past decade’s austerity hurt our social fabric. The Treasury’s assessment therefore seems reasonable.

This was a Budget, then, that sought to correct the previous government’s unrealistic plans for public spending and investment. It borrowed to invest – in public services and our national infrastructure – and increased taxes and trimmed welfare to fund public services. With the tax hikes targeting the rich, if the new funds successfully halt further decline in core public services, then we should welcome Ms Reeves’s first Budget as a progressive one.

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All articles posted on this blog give the views of the author(s). They do not represent the position of LSE Inequalities, nor of the London School of Economics and Political Science. 

Image credits: Martin Suker and Fred Duval via Shutterstock.