Budget needs to boost investment and growth

WHEN the Chancellor stands up to deliver the 2025 Budget, the central question will not be whether she can balance the books but whether she can reboot growth without choking off a fragile recovery. With the economy growing by only 0.1%, any missteps on tax risks tipping the UK from weak expansion into contraction.

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Rachel Reeves has staked her credibility on restoring fiscal discipline, and markets will want reassuring that public finances are under control while voters and businesses want to feel that better times are possible.

As a result, the dilemma at the heart of this Budget is how to be tough enough to satisfy the bond markets but not so tough that households and firms lose confidence.

The challenge is made harder by decisions already taken and by a labour market that is weakening with unemployment having risen to 5%, the highest level in four years.

In that environment, last year's decision to raise employers’ national insurance contributions looks even more questionable and, as the Bank of England governor Andrew Bailey observed, higher payroll taxes have led many businesses to cut hiring, reduce working hours and restrain pay.

Firms are also dealing with a sharp rise in the national living wage for over-21s and new workers’ rights that add further cost and complexity.

These policies are intended to improve living standards and security for those in work, but there is a real danger of unintended consequences, and faced with higher fixed costs and ongoing uncertainty, many businesses will delay recruitment, scale back investment or automate roles rather than taking a chance on new staff.

In that context, the reports that the Chancellor has abandoned plans to raise income tax rates are welcome as she had been on course to become the first chancellor in half a century to increase the basic rate, breaking a manifesto pledge in the process before a late U-turn allegedly driven by political and market concerns.