Time, at least in the institutional investment world, seemed to stand still in the lead up to the UK’s Autumn Budget. Investors became non-committal when asked about investment options as well as the wider outlook, offering one refrain: “Let’s see what happens in the Budget.”
Now that the chancellor, Rachel Reeves, has offered up what was the most anticipated Budget in living memory, it raises the important question of where it leaves investors. Rain Newton-Smith, chief executive of the Confederation of British Industry, said Reeves is taking a “slow road to growth”.
Investors could well draw the same conclusion about investment – there was a lot of talk about it. In fact, Reeves said the “only way to drive economic growth is to invest, invest, invest”.
But the road to investment that emerged from the Budget appeared long, winding and with no real roadmap, even if there are pinpoints along the way.
This is despite investment themes, or at least the rhetoric, being strong in the Budget. “To rebuild our country, we need to increase investment. The UK lags behind every other G7 country when it comes to business investments as a share of our economy. That matters,” Reeves said.
She added that there will be £70bn of investment through the new National Wealth Fund, with reforms to “planning laws to get Britain building again”. The National Wealth Fund announced by Labour early this year was established to boost economic growth and accelerate the transition toward clean energy.
Catalyse investment
Earlier this month, Reeves said the fund would work with investors to deploy up to £27.8bn of investment, with £22bn coming from the UK Infrastructure Bank and the British Business Bank establishing a British Growth Partnership to encourage more pension fund investment into the UK’s fastest growing and most innovative companies.
“The UK has fallen behind in the race for new jobs, new industries and new technology,” Reeves added. “By restoring economic stability and by establishing the national wealth fund to catalyse private funding, we have begun to create the conditions that businesses need to invest,” she added.
Reeves also revealed that Labour’s new rules on borrowing to invest will allow more than £20bn to be pumped into the “growth industries of the future”.
“This includes at least £6.1bn to protect core research funding for areas like engineering, biotechnology and medical science through Research England, other research councils and the National Academies [of Science, Engineering and Medicine],” Reeves said.
The chancellor also allocated funding to specific areas of research and development, including £2bn for automotive technology, £975m for aerospace and £520m for a new Life Sciences Innovative Manufacturing Fund.
The UK’s contribution to the EU science programmes, agreed by the previous government in 2023, will be funded at a cost of £2.7bn a year. The government will also extend the Innovation Accelerators programme in Glasgow, Manchester and the West Midlands.
Clarity and certainty
“We share the chancellor’s vision to grow the UK economy and ‘invest, invest, invest’, said Chris Cummings, chief executive of the Investment Association. “Long-term investment is truly the engine of growth, and our industry already channels £1.4trn into the UK economy.
“Long-term investment also needs clarity of approach and pol- icy certainty,” he added. “The proposed modern industrial strategy and corporate tax roadmap are a welcome starting point to attract greater capital.”
The lack of clarity on the nature of the investments is a big sticking point. “We look forward to working with the government, alongside the National Wealth Fund, to channel investment into innovation and growth-driving sectors,” Cummings added. “But this is the beginning of the journey and more will be needed to build domestic and international confidence to drive strong UK capital markets and reinvigorate economic growth in partnership.”
He also said that the chancellor had missed trick. “Fostering a culture of inclusive investment is also important to improve people’s financial resilience, yet the Budget was a missed opportunity to implement measures which could see more people reap the benefits of investing.”
Summing up the frustration with the Budget, Iain Campbell, head of LGPS investments at consultancy Hymans Roberston, said the Budget was a let-down for the local government pension scheme (LGPS). “The Budget was somewhat of a damp squib for the LGPS, with no further updates to their plans for issues like encouraging UK investment,” he said.
Nigel Peaple, chief policy counsel at the PLSA, was a little more conciliatory. “We welcome the focus in this Budget on investment, in particular, the change to the fiscal rules to support public investment and the promise of policy certainty provided by a long-term modern industrial strategy,” he said. “We also welcome the government’s use of the British Business Bank and the National Wealth Fund to facilitate pension fund investment in the UK, as we’ve recommended.”
Andy Briggs, chief executive of Phoenix Group, added that he hopes the government can still boost investment. “The way government invests alongside the private sector will be critical boosting growth in the UK,” he said. “Changes to the fiscal rules make economic sense if implemented in the right way.
“As a committed domestic investor, we hope these changes will ensure our capital works better alongside the government and helps catalyse investments in the social and economic infrastructure the country needs,” Briggs added.
Stronger emphasis
David Brooks, head of policy at consultancy Broadstone, said that despite the lack of detail in the Budget there is still much for the pensions and investment industry to look out for further down the road.
“We anticipate the chancellor will place a stronger emphasis on pensions in the upcoming Mansion House speech in November,” he said. “The summary of the first part of the pension review is imminent, and the second part of the review which is due to look at adequacy and wider issues, will also be launched around this period. The Pension Schemes Bill, likely to be before the House [of Commons] in the Spring/Summer 2025, also gives us plenty to look forward to, to discuss and plan for, from a pensions perspective,” Brooks added.
And John Donohoe, chief executive of fund management company Carne, offered an almost contrarian upbeat take on some of the announcements made by the chancellor, especially in regard to the National Wealth Fund. “This intent to mobilise capital and get it into the economy is a boon for the UK and for private asset management – and we expect to see this play out quickly and at scale,” he said.
Richard Tomlinson, chief investment officer at Local Pensions Partnership Investments, also offered a positive take, albeit slightly more qualified. “Any announcement that supports investment in the UK, particularly core infrastructure, is to be celebrated, so £70bn of investment capital catalysed through the National Wealth Fund could be money well spent,” he said.
But he added: “Among pension investors there is a consistent and increasing appetite to invest in UK infrastructure. Securing capital is not the missing piece of the puzzle, it’s the availability of suitable projects that often holds investors back.”
The chancellor’s commitment to improve infrastructure delivery suggests the government understands the challenge and is developing policy clarity to create more investment opportunities, added Tomlinson. “Alongside the ongoing review of the planning system, this could remove some of the hurdles to UK investment,” he says.
One detailed announcement involved an increase in carried interest to 32% from 28%. James Klein, corporate partner at law firm Spencer West, highlighted that there would be an impact on fund managers and those working in the investment management industry “to bear the higher tax liability on their carried interest payments as well as the fact that the higher rate might deter new investments and delay new ones which would negatively impact investment into scaling UK businesses”.
This may not be the end of the matter according to Greg Pogonowski, wealth planner at financial advisers Kingswood. “It is likely to rise further from April 2026 when it will be subject to a new regime. This could affect returns on funds,” he said.
From an ESG perspective, Bramwell Blower, Share Action UK’s public affairs manager, said the Budget was “encouraging to see the chancellor taking steps today to increase public and private funding for the UK’s clean energy and green infrastructure.
“The government should now introduce ambitious measures to ensure that private capital is invested responsibly, in the public’s best long-term interests,” he added. “This includes maintaining a robust stewardship code, setting requirements for transparent financial reporting, and reforming fiduciary duty so that our pensions work better for people and planet.”
Tax raising
Reeves also wasn’t the first chancellor to promise an “end to short termism”. Many before her have issued such a message only to be lost in the reality of politics.
The headline surrounding the Budget was that it was the second biggest tax-raising Budget in history, after Norman Lamont walked up to the dispatch box in 1993, despite promises in the Labour manifesto that there would be no new tax increases to the £8bn it had “costed” in the run up to the election.
This for Darius McDermott, managing director of broker Chelsea Financial Services, conflicted with the growth aims of the chancellor. “For a government aiming to spur growth, several of Reeves’ policies seem anti-business,” he said.
He cited particularly the increased national insurance (NI) contributions and a lowered employer NI threshold which “will drive up hiring costs and increase unemployment”.
Within the wider economic context, Reeves revealed her plans would lead to a slightly higher forecast for inflation, with the Office for Budget Responsibility (OBR) saying CPI inflation will average 2.5% this year, 2.6% in 2025 and 2.3% in 2026. It will fall to 2.1% in 2027 and 2028 before rising to 2% a year later.
And when it comes to the economy, the OBR forecasts GDP growth will be: 1.1% this year and 2% in 2025. It falls to 1.8% in 2026, 1.5% in 2027 and 2028 but making a comeback to 1.6% in 2029.
Reeves says the current Budget will be in deficit by £26.2bn in 2025-26 and £5.2bn in 2026-27, before moving into surplus of £10.9bn in 2027-28, £9.3bn in 2028-29 and £9.9bn in 2029-30.
Bond impact
With the 2022 Budget fresh in investors’ minds, many looked at how all this impacted on bonds. Since the Budget, bond yields spiked leaving the 10-year gilt yield to sit at around 4.36%.
Hal Cook, senior investment analyst at Hargreaves Lansdown, said: “The uncertainty surrounding this specific Budget had made bond investors nervous, with expectations of higher future borrowing in particular weighing on sentiment towards the attractiveness of UK government debt.”
The combination of these factors meant that the yield on 10-year gilts had risen to around 4.3%. “This remains lower than the level that they hit following the commonly referred to ‘disastrous’ Truss/Kwarteng mini-Budget in September 2022,” Cook added.
In what was a huge move, the 10-year gilt yield moved from around 3.3% a couple of days before that mini-Budget, up to around 4.5% days after it.
Yields up
Investors do seem to have pulled back on the number of interest-rate cuts that are now likely, as shown in the swap markets as a result of the budget, pushing up the yield on rate-sensitive two-year bonds.
But Andy Haldane, the former chief economist at the Bank of England, said the bond market is unlikely to hit crisis proportions. “My guess would be that bond markets won’t fall out of bed. And, of course, what matters to bond markets is a good story about growth,” he said.
But the key point is the Budget failed to put investors centre stage in the way many expected given the chancellor’s commitment to growth. Something Reeves needs to rectify.
“Only the private sector can provide the scale of investment required to deliver the government’s growth agenda,” Rain Newton-Smith said. “It’s vital that the government doubles down on its partnership with business to unlock the investment that is needed to drive opportunity around the UK.”
There were other concerned investment voices with different takes on what Reeves announced. In an investment note, asset manager Investec said the Budget “is a calculated risk which could back re, leaving the UK’s fiscal position in a worse mess than when it started”.
Whether that could be the outcome of the 2024 Autumn Budget only time will tell. In the meantime, investors will have to wait longer to see what the government has up its sleeve to create the hoped for investment boom.
The clock though continues to tick.
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