Labour’s Historic 2024 Budget: A Bold Plan for Growth Amid Inflation Risks

The November budget of 2024 was always going to be historic for several reasons. It marked the first budget delivered by a Labour Government in 14 years, the first to be presented by a women in 800 years, and, perhaps most notably, the first to spark such uncertainty about what would follow. The Liz Truss and Kwasi Kwarteng spectacle of 2022 still looms large in the minds of most investors, casting a long shadow over Westminster as Rachel Reeves took centre stage.

Labour had cemented within their manifesto a commitment to fix public services, invest in the UK economy and boost productivity. Their promise of higher living standards was framed as a pledge to do so without burdening working people and ensuring more pounds would remain in their pockets. The only way to achieve this was for Rachel Reeves to launch one of the biggest tax raising budgets of the modern era, aimed at funding Labour’s spending spree.

The £22bn black hole supposedly left by the Conservative leadership was a key factor behind Reeves’ decision to raise National Insurance contributions by employers from 13.8% to 15%. This move became the single biggest revenue generator of the budget and enabled them to avoid a direct tax on employees whilst generating funding for the Labour’s grand plans. There were also movements in capital gains tax, with the lower rate moving from 10% to 18% and higher rate from 20% to 24%. While some had speculated that these hikes could be even steeper, Prime Minister Keir Starmer, true to his word, had tempered the rise in recent months and duly delivered.

The broader news wasn’t as positive. From January 2025, VAT would be applied to private school fees, expected to generate £1.8bn in revenue. It begs the question of what additional strain it could place on the vulnerable education system. Inheritance tax changes were also on the table, with pension pots set to be included in calculations starting in 2027. The biggest backlash appears to have come from reforms to Agricultural Property Relief. Under the new rules, the full 100% relief from inheritance tax will be limited to the first £1million of agricultural property. While projections suggest this will only impact around 500 estates, the echoes of George Osbourne’s ‘Pasty Tax’ or Philip Hammond’s National Insurance contributions proposals ring out, and this measure as well appears to be a key contender for backtracking under social pressure.

Private equity was firmly in the spotlight in this budget too, with many fearing the reprisal that Reeves may inflict on carried interest. Labour has long argued that performance-based pay should not be treated as capital gains and therefore fall under the income umbrella. Labour’s eventual decision was to increase capital gains tax on carried interest from 28% to 32%. Income tax bands will also be applied to carried interest as of April 2026.

A report by Ernst & Young last year highlighted the vital role that private equity plays in the UK economy, contributing 6% to GDP and supporting 2.2 million jobs. While the increase in tax was seen as necessary to meet public obligations, Reeves’ approach aimed to balance fairness with the need to keep the sector competitive. The hike was designed not to undermine the attractiveness of private equity, ensuring that the industry remains within the UK and aligning policies with those in Europe.

To aid the funding of this expansion the budget turned to an increase in UK gilt issuance. Labour plans to sell £297bn of gilts in 2024/25, up from the estimated £293bn. This will be the second highest gilt issuance behind the Covid-19 Pandemic. The immediate market reaction to the budget saw a surge in the selling of domestic bonds, which has continued driving up yields north of 4.5% on UK 10yrs. Although these levels are elevated and comparable to a Truss/Kwarteng budget, the path here has been far more gradual, controlled and less volatile.

As investors digest the concept of a Labour government focused on spending to drive growth, the pro-inflation argument appears to be a key concern for many. The Office for Budget Responsibility has revised its forecasts for CPI to average 2.5% this year and GDP to follow a similar trajectory. If these scenarios develop as planned, the path of Bank of England cuts could be in for a slowdown. Governor Bailey delivered on his 25bp cut for November as predicted, he has signaled that inflation may remain higher for longer, meaning further rate cuts could be priced out of the curve.

The risks on the horizon are slowly clearing with the end of the calendar year now in sight. Rachel Reeves delivered what many had expected, although some may view the measures as less disruptive than anticipated. Labour’s message is clear: tax rises are here to be invested and grow the UK economy. Consequently, the risks to inflation ascending are apparent but the lag between action and outcome will take time to materialize. Sterling has seen some minor weakness since the budget announcement but has fared better than the euro around the volatility of the Trump presidency and dollar driven markets. Should higher inflation and growth become reality, the gradual cuts in rates will be supportive of sterling in the medium term. That said, as Trump returns to the White House, the advancement in USD may overshadow these effects.