UK budget strategy should build on services-led economic resilience

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UK budget services-led strategy

Highlights

IMF upgraded UK 2023 growth forecasts and official data showed unemployment at a one-year low, driven by high-value services and technology investment.
UK professional services, particularly in AI-linked consulting, and above-trend technology investment attracted over a third of European venture capital in the first nine months of 2023.
Indications of unchanged capital gains tax and use of existing fiscal headroom support businesses, but potential new bank taxes raise competitiveness and lending concerns ahead of the October 28 Budget.

Services and investment underpin growth outlook

As reported by the Financial Times, the UK’s recent economic resilience reflects the relative strength of business services and technology-linked investment at a time when industrial production and consumer spending are under pressure in many advanced economies.

The article says the IMF last week gave the UK one of the largest upgrades to growth forecasts for this year among major economies, while official data released on Tuesday showed unemployment fell to its lowest level in more than a year. It argues that the country’s specialism in high-value services is offsetting the drag from U.S. protectionism, stronger competition from Chinese exports and the effects of an energy price shock.

Professional services make the largest contribution to annual growth in the three months to August, according to the Office for National Statistics. Computer programming, consulting and legal activities stand out, while London advisory firms and boutique consultancies are benefiting from global demand from organisations adopting AI and managing uncertainty.

Business investment is also supporting the economy. Spending on technology is running above its long-term trend, partly because of wider domestic AI adoption, and innovative UK companies attract more than a third of European venture capital in the first nine months of this year.

Budget choices and growth strategy in focus

The stronger backdrop does not remove longer-term risks, because the UK’s advantage in services and technology depends on a broader ecosystem of private finance, research, investment and highly skilled workers. That leaves the Budget on October 28 as an important test of whether the government can reinforce the conditions behind current resilience.

Healey is described as having avoided the kind of pre-Budget speculation that weakened business confidence before Labour’s previous major fiscal events. Indications that capital gains tax may remain unchanged and that existing fiscal headroom may be used to avoid major tax increases are presented as supportive for markets and companies.

However, the prospect of additional taxes on banks raises concern because higher levies could weaken lenders’ competitiveness and reduce their capacity to support the private sector. A preferable route for any extra cost-of-living support would be welfare savings, the article argues, which could also help reassure bond markets and ease borrowing costs for businesses and households.

The expected low-key Budget should still begin to set out a credible growth plan. That, the article says, means moving beyond vague calls for re-industrialisation and instead advancing measures such as cutting red tape by 25% and simplifying the tax system, including distortions in income taxes, to strengthen incentives to work and invest.

In our earlier coverage of Chancellor John Healey’s pre-Budget stance, we noted his commitment to an IMF-backed deficit-reduction path ahead of the October 28 fiscal statement. The piece also highlighted August GDP growth of 0.1% that beat expectations, alongside mounting political debate over bank taxes and the need for deeper structural reforms to support longer-term UK growth.

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