Hoping for a boring Budget at the Industry Leaders Conference

In summary

• Despite the gloom, the service sector, boosted by AI-driven productivity improvements, is helping bolster Britain’s growth

• An unexciting Budget could give businesses and individuals the space and stability they need for that to continue, and the Chancellor should sit on his hands

• Whether he does will depend not just on the government’s political priorities, but also whether external events and ballooning debt give him the choice

• Businesses and individuals prepare by examining their exposures, wait to see the detail and don’t let the tax tail wag the dog

Sometimes it’s best to do nothing. Despite the headlines and much of the gloom over the UK economy, growth this year has consistently surprised on the upside. The UK has had the fastest growth in the G7 so far this year, and it is, in the words of S&W Economic Advisory Partner Jonathan Gillham, “good growth”.

Opening S&W’s Industry Leaders conference with an overview of the UK economy, he noted that growth over the last two decades has been driven by government spending and household consumption. Growth is now being driven by the information and communications industry, professional and scientific industries and the service sector generally.

It’s been enabled by leaps in AI, helping boost productivity in services, which have previously struggled to achieve greater workforce efficiencies.

“I’ve been working with AI tools the last two years. The last six months the jump has been incredible, and I think there are more jumps to come,” he said.

As a result, the UK, heavily tilted to services that struggled to increase productivity through scale, has gone from “the sick child of the G7” to one now well placed to benefit from the technology revolution.

Should AI adoption add even 0.5% to the OBR’s downgraded productivity growth forecasts for the next decade, the UK economy could be 30-40% bigger.

Against that backdrop, what businesses, entrepreneurs and investors could use most is breathing space from the government. As Toby Tallon, S&W’s Head of Entrepreneurs and Private Businesses, said in an afternoon session looking ahead to the Budget, after promising to promote growth, the last two fiscal events have done the opposite.

“We’ve had two Budgets that have been anti-growth, anti-business, anti-wealth creation, and increasing tax revenue by £66 billion a year,” he said. We’ve seen capital gains tax rises, inheritance tax relief reduction and employers’ NI contribution increases, as well as rises in the Minimum Wage and new employment regulation “and a side dollop of fiscal drag”, he added.

Predictions that Autumn’s Budget may be a “fiscal non-event” would be welcome. “The hope is no more changes, please,” said Tallon.

It’s not the only possibility, however. Along with fiscal discipline, the government also has other priorities: growth, investments and greater “fairness”. It may not be able to have all of them. In fact, as the panel noted, there are at least three broad possibilities at the Budget:

• A growth Budget, regardless of revenues – increasing capital allowances reliefs, increasing employment incentives and seeking any means to bolster business confidence

• A revenue-first Budget, where strengthening the public finances is the priority, with reliefs under scrutiny, allowances reviewed and a focus on broadening the tax base

• A fairness-first Budget designed to see those with greater resources contributing more, further tilting taxes to the higher paid and wealthy

In truth, though, as Sharpe said, the real Budget is likely to be a mix of the three. “Political expediency demands that is what you end up doing,” he said. “Whether that gives you a good Budget remains to be seen.”

But it’s important to note that it might not entirely be the Chancellor’s choice.

“When clients ask what I expect to see in the Budget, I often respond by saying I think they’re asking the wrong question,” said Hayward. “The real question is what choices does the Chancellor actually have available.”

As Gillham noted in his morning session. While the UK may have the fastest growth in the G7, the other part of the story is that it’s got the highest borrowing costs in a generation.

An uneventful Budget would be best, he said.

“Chopping and changing, putting up rates and closing down rates just creates more uncertainty. [Doing little] doesn’t necessarily solve the problems, but at least it gives businesses stability,” Gillham said

“We do have to get the interest rate down. It is unsustainable, but disrupting the bond markets further with a bad Budget is only going to cause more problems. This might be a genuine opportunity for a Chancellor to sit on their hands and make life a bit easier and a bit more stable.”

The problem is that he may not have that luxury. The Chancellor’s fiscal headroom of £24bn in March has halved by most estimates because of inflation and borrowing costs. The Chancellor already has “virtually no manoeuvrability”.

A worsening or extension of the Middle East conflict, higher inflation, a financial market rout or even a bursting of the AI bubble could leave no option but to raise or cut spending.

In the face of such uncertainty, what can individuals and businesses do?

First, they should give up trying to predict the Budget contents, and not start their planning on tax: “Never let the tax tail wag the dog,” said Hayward. “It should start with objectives, so the strongest plans I see are the ones that would still make commercial sense even if the Chancellor announced another round of tax changes on 28 October.”

They should work to understand their exposures and how tax changes would impact them, prepare plans and be ready to pivot, but wait to see what happens.

Second, when the Budget does come, they need to dig into the details. As Sharpe put it, “The headlines will dictate the reaction; the details the actual impact.”