Weekly Blog - 2 November 2024 - Budget Response

How did this week's budget do on addressing the things Arise is calling for in our 4 Shifts campaign for a green and fair economy?

Budget response

On Wednesday 30 October the Chancellor Rachel Reeves set out the first budget of the new Labour government. This was a tough balancing act against a background of a very challenging economic environment and extremely stretched public services. There are no easy answers, and it was never going to please everyone. Arise’s 4 Shifts campaign sets out a vision for a UK and global economy that is thriving, fair, green and works for everyone in society, based on Biblical principles (4 Shifts Report). In a blog earlier this year we set out what the government needed to do in its first 100 days to progress towards a green and fair economy. Now, 120 days later, in our latest weekly blog we assess how the Chancellor’s budget did on each of these essential shifts that are needed to achieve a just and sustainable economy.

Shift 1: Clean energy

What we need
To tackle the dire emergency of global climate change the UK and every nation needs to take urgent steps to scale down the use of fossil fuels to zero emissions and scale up clean energy to 100% by 2030, banning the future use of fossil fuels and doing this in every sector (energy, transport, building, industry etc.) This is the level of change the experts say is needed to avoid the worst impacts of climate change. It is entirely possible, and will be significantly beneficial for the economy as well as the environment, unleashing billions in investment and creating tens of thousands of new green jobs.

What happened in the budget
The Labour government does in fact intend to deliver a zero-carbon electricity system in the UK by 2030. In the budget Rachel Reeves committed an extra £100 billion investment into infrastructure in the UK over the next 5 years, much of this to fund the transition to clean renewable energy. The Office for Budgetary Responsibility expects this investment to also stimulate billions more in private investment. The Department for Energy Security and Net Zero had its capital budget increased by 25% over the next 5 years (the largest of any government department). There was £125 million to set up Great British Energy and £163 million committed to the Industrial Energy Transformation Fund. There was funding for 11 new green hydrogen projects and £3.9 billion for carbon capture and storage. There was support for low carbon transport, with investment in regional rail networks, the TransPennine Route Upgrade and East West Rail. There was an extra £200 million for better public transport within cities. There was also an extra £1 billion for bus services and £100 million for walking and cycling routes. There was an extra £200 million for electric vehicle charging points. Higher carbon transport was taxed harder with vehicle excise duty increasing on non-hybrid cars, and air passenger duty on private jets was increased by 50%. The Energy Profits Levy on oil and gas firm profits was increased from 35 to 38%. There was £3.4 billion for the Warm Homes Plan to help drive the shift to better insulated, lower carbon emitting homes.

What needs to happen next
These are important steps forward, but further investment is still needed. Furthermore, the plan to deliver a zero-carbon electricity system in the UK by 2030 needs to be expanded out to include every sector not just energy generation – transport, heating/buildings, industrial emissions etc. Next the government should …

Set out a clear plan for the UK to get to absolute zero emissions by 2030, and expand that commitment to cover not just power generation but all sectors (transport, heating/buildings, industrial emissions etc.).
Take that position beyond the UK to the international community too, and call for a raising of ambition to that level in all nations through the UN climate change talks.

Shift 2: Circular economy

What we need
Our current linear economic model uses polluting methods to extract, consume, and then discard natural resources faster than the planet can replenish them. This threatens not just God’s amazing creation, but also human society and existence itself, which is a fundamental part of that creation. We are deeply dependent upon a flourishing, healthy and diverse natural environment to provide the fresh water and food we need to survive, the clean air we need to breathe, the clothing we wear, the natural resources to build our homes and on which our economy is based. We must shift to what experts call a circular economy. Just as God designed his creation so nothing is wasted in nature but gets broken down and reused in the biosphere, a circular economy would eliminate all pollution, overconsumption and waste and push resources back around the economy in a circular fashion, moving us back into balance with creation as God intended. The UK and every nation should agree new circular economy laws that ban all polluting activity, further human expansion into wild lands, the production of natural resources that takes out more than it puts back in, and all waste. As with the urgent action required on climate change above, this sounds radical, but is entirely possible, and indeed is in our own economic interests too.

What happened in the budget
The Labour government does in fact intend to ‘clean up rivers, lakes and seas’, ‘ensure nature recovery’ and move Britain to a ‘zero waste economy’, amongst other things as part of its policies. In the budget Rachel Reeves committed to a 38% increase in the funding available for Environmental Land Management Schemes to £1.8 billion. In addition, a further £200 million per year will be invested over the next two years in tree planting and peatland restoration.

What needs to happen next
These are positive steps, but nowhere near enough or fast enough for the transition to a circular economy that the UK and the world urgently needs to see. The new government needs to set out a specific target date of moving the UK to a zero waste economy by no later than 2030. It also needs to expand this ambition to also include ending all polluting activity, ensure protected status for all wild natural habitats in the UK’s land and seas, and banning all unsustainable production. Further investment is needed to support this transition. Next the government should …

Set a target date for moving the UK to a zero waste economy of no later than 2030, and commit to expanding this ambition to also end all polluting activity, ensure protected status for all wild natural habitats in the UK’s land and seas, and banning all unsustainable production.
Commit to taking this ambition to the international community too, and call for a new global circular economy agreement to cover the same areas.

Shift 3: Strong and fair economy

What we need
Alongside the above two shifts to transition the UK and global economy to be green and sustainable, further shifts are still needed to ensure the economy is thriving and fair and working for all in society. The first of these is for the UK and every nation to have a proactive national industrial and economic development strategy. This should ensure governments take a proactive and partnering approach, working with the private sector with intentionality to design the policies that ensure a thriving and fair national economy. The UK’s last industrial strategy ran from 2017 – 2021, since when the previous government supported industry in a more ad hoc way. The new Labour government does in fact plan to bring back a new industrial strategy. It launched a consultation on a draft ‘Green Paper’ on this two weeks before the budget on Monday 14 October. The final strategy is due to be launched in Spring 2025, but of course much of this week’s budget was closely linked to the draft strategy.

What happened in the budget
The big story of the budget was of big tax rises (see below) in order to fund significantly scaled up investments into public services (see below) and infrastructure (see above) in order to drive UK economic development. In addition the government changed its self-imposed rules on borrowing to enable it to borrow more to invest in infrastructure, which in theory should provide a positive return in terms of national economic development. The calculated economic risk the Chancellor and the government are taking is that the negative hit of tax rises will be offset by the positive impact on stimulating the economy. To consider the negative side first, much of the tax increases will fall on business directly. For example companies will pay 15% National Insurance on salaries above £5000 from April (with exemptions for smaller businesses). The profits from successful deals of private equity managers will increase from 28% to 32%. Capital gains tax paid on profits from selling shares will increase from 20% to 24%. The risk of such measures is that they will weaken the economy, and especially of the first, that it will reduce the capacity of firms to employ staff, thus negatively affecting ordinary people. On the positive side, the extra £100 billion of investment into infrastructure, much of it into green infrastructure (see above) is a really essential part of driving investment and stimulating the economy and of any health industrial strategy. This side at least has been welcomed by many business groups, although they have been much more critical of tax rises. The budget also contained measures for better working conditions and a rise in the minimum wage by 6.7%. Again these are crucial elements of growing a strong and fair economy. The independent Office for Budgetary Responsibility says that the measures in the budget will positively grow the economy in the next couple of years, but that this will trail off in the two – three years after that. So further investment will be needed. Time will tell whether the Chancellor has made the right decisions to strengthen a strong and fair economy in the UK and around the world.

What needs to happen next
The budget has much in it which could help to develop a stronger, fairer national economy. But once more, there is much more to do, not just for the UK, but for every country in the world. Next the government should …

Launch the new industrial and economic development strategy for the UK, and ensure it leads to good well-paid jobs with good conditions.
Through its foreign aid and international policies, the government should encourage and support every nation to develop their own industrial and economic development strategy.

Shift 4: Tax and social spending

What we need
It is crucial that all in society benefit from a green and fair thriving economy, not just the wealthiest. Inequality has been growing in the UK and around the world in recent years, and increasingly more and more people struggle to find decent well-paid jobs with good conditions. Meanwhile the cost of living has gone up dramatically, and the public services that so many rely on are struggling. Therefore, appropriately taxing the wealth generated through the national economy and providing essential services through public spending so all in society benefit, not just the wealthiest, is essential. Arise has conducted extensive research into how much the most successful countries with the healthiest economies and lowest levels of poverty and inequality collect in tax and spend on social services. As a result, the 4 Shifts campaign recommends that the UK and every nation should collect tax at an amount equivalent to at least 45% of the national economy, one third from income taxes, one third from wealth taxes and one third from other taxes, and spend at least two thirds of this on healthcare, education and social protection (pensions, benefits etc.).

In the last couple of years since the Covid pandemic, the government has collected about £1,095 billion in taxes (around 40% of the size of the national economy), and spent slightly more in public expenditure (around 44%). So the total amount of taxation and public spending is heading towards the right levels, yet the corresponding benefits are not being felt as widely as they should. This is because firstly the balance of where tax income is coming from, and secondly the balance of where it is spent, is skewed. Currently around 47% of tax comes from taxes on income (income tax, national insurance etc.) but only around 9% from wealth taxes (capital gains tax, inheritance tax etc.) and around 45% from other taxes (consumption taxes, business rates etc.), rather than a balance of a third each, that the 4 Shifts campaign calls for. This means income and taxes on products etc. are proportionately higher than they should be, whilst wealth (assets, finances etc.) is significantly undertaxed. Rebalancing the tax taken from these sources would mean the very wealthiest in society who can afford it, would pay proportionately more through taxing unearned and extreme levels of wealth. This would still be at very manageable levels, leaving them far wealthier than average citizens. Meanwhile taxation on earned income through hard work can be significantly decreased. Thus, by focusing mainly on rebalancing, rather than increasing, the total tax rate, ordinary people can be left significantly better off.

There is also rebalancing needed on the expenditure side too. The 4 Shifts report call for two thirds of public expenditure to be spent on health, education and social protection (pensions, benefits etc.) and a third spent on other kinds of government expenditure. Currently only 47% of public spending is on health, education and social protection, and of the other types of state spending, a significant proportion is on interest and national debt repayments. A significant rebalancing is needed, providing a huge extra injection of cash into essential basic services that so many are dependent upon and again lifting up the lives of the vast majority of ordinary people and significantly reducing the inequality gap, together leaving ordinary people healthier, better educated and better paid. (There should also be a real focus on reducing that interest and national debt.)

What happened in the budget
The Chancellor took some steps in this direction in her budget. She announced tax rises of £40 billion, all broadly progressive, so that the wealthiest in society who can afford to pay more do so, helping to reduce inequality. As set out above companies (rather than workers) will pay 15% National Insurance on salaries above £5000 from April (with exemptions for smaller businesses). The profits from successful deals of private equity managers will increase from 28% to 32%. And, capital gains tax paid on profits from selling shares will increase from 20% to 24%. (There are also down-side risks of such measures in potential reduced employment, see above.) The stamp duty surcharge paid on second home purchases in England and Northern Ireland went up from 3% to 5%. VAT will be paid on private school fees from January 2025. On the spending side too, the budget went some way towards improving the balance of public spending. Much of the tax rises will go to fund the biggest increase in funding for the NHS since 2010, including £22 billion extra for frontline services and £3 billion for equipment and buildings. The state pension will also rise, and there is an extra £1.3 billion for local councils. On the negative side, the Chancellor failed to increase overseas aid spending which benefits the very poorest people in our world, back to its previous level of 0.7% of Gross National Income, and in fact did not renew a temporary 2 year boost to aid funding brought in by the previous government.

What needs to happen next
The Chancellor and the new government have taken some steps in the right direction. However, there is a lot further they could go to rebalance the tax and social spending system in the UK to make it work more effectively for all in society. Next the government should …

Set out a revised budget to collect tax at an amount equivalent to at least 45% of the national economy, one third from income taxes, one third from wealth taxes and one third from other taxes, and spend at least two thirds of this on healthcare, education and social protection (pensions, benefits etc.).
They should also commit to taking this ambition to the international community too, and calling for a new global tax and social spending agreement for these level in every nation, so all benefit.

Conclusion

There are some good steps, some missteps and some big risks in this week’s budget. The next steps outlined above would help to build on what is good in the budget, address what is missing, and speed the urgently needed transition to a green and fair economy in the UK and the world. There are further more detailed ideas for the government in each of these areas in our 4 Shifts Report.

Find out more

Arise Manifesto – Find out more about why the world needs to shift to a green and fair economy in the Arise Manifesto, Arise’s big picture, researched, Biblical, holistic and practical vision for a better world.

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