Balancing the Books: Rachel Reeves’ 2024 Budget and Its Impact

Sean O’Sullivan

Rachel Reeves, the UK’s Chancellor of the Exchequer, introduced her 2024 Autumn Budget on October 30, 2024, addressing an estimated £22 billion “black hole” in public finances through targeted tax reforms designed to generate an additional £40 billion in annual revenue. This fiscal gap, largely driven by past underfunding and growing expenditure demands, is mostly tackled through increases in capital gains tax, employers national insurance contributions, inheritance tax adjustments, and the abolition of the non-dom tax regime, which collectively aim to close the deficit, reducing the need for further borrowing​.

While these revenue-raising measures could improve fiscal stability, they bring potential economic implications, particularly for consumer spending, business investment, and the housing market. 

Effect on Consumers

Rachel Reeves’ 2024 budget is expected to create a mixed impact on consumer spending. High-income households have been targeted with tax rises in capital gains, and the abolition of the non-dom regime. This ends the special tax status that allowed high-income individuals to avoid paying taxes on foreign income. This is expected to reduce discretionary spending, particularly in luxury sectors such as travel or high-end retail. Wealthier households may adjust their budgets to offset these higher tax costs, leading to a slight dip in non-essential spending.

For middle and lower-income groups, essential spending on necessities should remain steady, as the budget avoids VAT, income tax and national insurance increases. Thus, reinforcing Reeves' view that the budget was made “to protect working people”. Nevertheless, increased duties on tobacco, sugary drinks and air travel may curb spending in these specific areas. If inflation stabilises, consumer confidence may support spending growth, though cautious sentiment could temper spending across all demographics​.

Effect on Businesses

Rachel Reeves' 2024 budget introduced a 1.2% rise in employer National Insurance (NI) contributions, a key measure to help close a £22 billion fiscal deficit. This increase is expected to significantly impact businesses, particularly those with large workforces, raising their payroll costs. Small businesses with an annual payroll under £1.1 million are exempt from this rise, avoiding the additional financial strain faced by larger companies. 

For many businesses, particularly small and medium-sized enterprises (SMEs) that are not exempt, the NI increase could slow growth, limit hiring, and potentially affect wage increases, as these businesses will face higher operational costs. This could slow economic recovery, particularly in sectors reliant on their workforce, for example the retail market, who are highly sensitive to increased payroll costs . Furthermore, as companies pass these costs onto consumers, inflationary pressures may increase, reducing household purchasing power and hurting consumer spending, a crucial component of economic growth​. 

Whilst the NI increases are expected to hurt businesses, who are expected to carry most of the burden from the budget, the government has forecasted  increased private sector investment. Reeves' budget includes several measures designed to foster a prosperous environment for business growth, especially in high-tech and innovative sectors. Business investment is a key indicator, however compared to other G7 economies, the UK consistently ranks lowest in business investment, a position it has held since 2019. 

One of the key strategies in the budget is the establishment of the British Growth Partnership. This initiative is aimed to channel capital into UK companies, particularly during their scaling phase. Scaling is a critical period for many growing businesses that struggle to secure the funding they require. The program seeks to bridge the investment gap between the UK and other economies, such as the United States, by facilitating greater involvement from UK pension funds in supporting high-growth sectors​. Additionally, the government is increasing funding to the British Business Bank, which will play a pivotal role in enabling more accessible capital for scaling businesses across the country. This initiative is geared toward addressing long-standing challenges in accessing sufficient risk capital and creating a supportive investment ecosystem​. 

Ultimately, by encouraging institutional investment in high-growth potential companies, the government hopes to stimulate innovation and make the UK a more attractive location for investment, boosting job creation and overall economic growth​. Whether this will outweigh the extra burden businesses now face with increased national insurance contributions and capital gains tax is yet to be seen.

Effect on the Housing Market

The 2024 UK Autumn Budget introduced several measures directed towards the housing market. Key changes include an increase in the Stamp Duty surcharge on second homes, from 3% to 5%. This hike aims to discourage additional property purchases, which could slow investment in the buy-to-let market as landlords and other investors face higher costs. Some estate agents are already observing transaction delays and renegotiations, as buyers try to manage the increased upfront costs. This shift is likely to reduce competition in the housing market, potentially slowing house price growth in the short term, especially in areas where buy-to-let activity has been high.

Additionally, the budget continues to support affordable housing, with £500 million earmarked to address supply constraints and fund the construction of over 33,000 new homes as part of a larger initiative. This investment is expected to boost rental and housing availability in lower-income areas, which could relieve some of the demand pressure on the broader housing market, thus reducing rent prices.

For first-time buyers and those moving homes, the existing Stamp Duty thresholds will be lowered in April 2025, from £425,000 to £300,000. This change may drive a short-term surge in demand as first-time buyers try to enter the market before the threshold lowers. However, after the change, first-time buyers may find it harder to get on the property ladder due to increasing upfront costs. 

Summary

Rachel Reeves' 2024 Autumn Budget seeks to close a £22 billion fiscal deficit through targeted tax hikes, including increased employer National Insurance, capital gains, and inheritance taxes, as well as the abolition of the non-dom tax regime, all expected to raise an additional £40 billion annually. While these measures aim to restore fiscal stability, they carry economic implications: higher NI costs may strain business growth and hiring, though policies like the British Growth Partnership encourage private investment to foster innovation. For consumers, increased taxes on wealth could reduce luxury spending, though essentials should remain largely unaffected. In the housing market, increased Stamp Duty on second homes may deter investors, while new affordable housing funding could help address rental pressures, though a lowered Stamp Duty threshold for first-time buyers in 2025 may ultimately make homeownership more challenging. This budget represents a careful balancing act between fiscal responsibility and economic growth, though its success depends on how well it supports both business resilience and consumer spending.