The Budget: what it means for the food system

The Office for Budget Responsibility (OBR) has issued a new Economic & Fiscal Outlook (EFO) document. This forms the basis of the Chancellor’s first Budget, published simultaneously.

The debt challenge

The EFO shows the scale of the strategic challenges inherited by the new government, central to this challenge will be the debt levels. UK borrowing will increase by £19.6bn this year and by an average of £32.3bn over the next five years, in part due to the spending decisions made by the Chancellor.

The government has introduced two new fiscal rules: The stability rule will balance the current budget so that day-to-day costs are met by revenues. The investment rule ensures net financial debt falls as a proportion of GDP. Both rules are set to be met two years early in 2027-28.

Alongside the two rules, the chancellor has announced that the government definition of ‘net financial debt’ will now use the broader definition of Public Sector Net Financial Liabilities (PSNFL).  This measure sets out the liabilities of the government as well as the assets in the public sector.  The assets of the government had previously been excluded from the definition of public debt.

By including the assets of the government on the balance sheet, this should lower the percentage of ‘net financial debt’ as a proportion of GDP. This provides a government more headroom but also a greater incentive to invest in capital expenditure, to build the ‘asset’ side of the balance sheet.

Government debt interest payments are determined by the financial markets and raising capital to invest through increased borrowing, can increase the return that investors require. This can increase the cost of borrowing for the government.

Note that there will be a full Spending Review in Spring 2025, covering at least three years.

Key OBR forecasts

The UK economy has shown sluggish growth in the second part of 2024, driven mainly by population growth, rather than improving per-capita performance.

OBR anticipates that this general situation will continue in the short- to mid-term. The next few years will be characterised by sluggish growth with growth of 1.1% in 2024, 2% in 2025, 1.8% in 2026 and around 1.5% from 2027 onwards.

Inflation has dissipated and nominal wages have continued to rise - disposable incomes have grown, although the rate of growth is slowing.

Inflation is expected to average 2.5% this year, 2.6% in 2025, and 2.3% in 2026 before falling back to the 2% target in 2029.

Unemployment is forecast to peak at 4.3% in 2024 and fall back to 4.1% in mid-2027.

Real household disposable income is expected to rise by 1.25% a year in 2024-2025 and 2025-2026 and before slowing sharply between 2026-2028.

The OBR predicts that this slowing of disposable incomes will be in part due to “a substantial part of employer National Insurance Contributions increase being passed onto real wages.”

The Budget

The Budget, based on forecasts from OBR, sets out how the new government intends to manage debt, finance its plans and manage the economy.

Accelerating GDP growth is the central government mission and this government views investment as the means to achieve this. Public sector investment and capital expenditure in infrastructure will increase by over £100bn in the next five years. Significant capital funding has been set aside for the NHS, education and transport. The government intends to set out planning reforms to remove barriers to growth in the long term in the coming months.

Other growth incentives have been announced including:

• The development of a 10-year infrastructure strategy to be published alongside Phase 2 of the Spending Review

• The soon to be published Get Britain Working White Paper,

• The establishment of Skills England “to ensure we have the highly-trained workforce needed to deliver economic growth”

Policy measures impacting the food system

There are also specific policy measures which will be of particular interest to the food system, including:

• Employer National Insurance contributions increase from 13.8% to 15% from 06 April 2025. The Secondary Threshold – the level at which employers become liable to pay NI on each employee’s salary – will reduce from £9,100 per year to £5,000 per year.

• There will be relief for small businesses as the Employment Allowance will increase to £10,500 from £5,000 and be extended to all eligible employers by removing the £100,000 cap, allowing firms to employ up to four NLW workers full-time without paying employer NI on their wages.

• The National Living Wage (NLW) will increase from £11.44 per hour to £12.21 per hour from April 2025. The NLW for 18 to 20-year-olds will also rise from £8.60 to £10.00 an hour as the government intends to bring in a phased approach to a single adult wage rate.

• Business rates relief has been extended, albeit with a reduced discount, from 75% to 40% for retail, hospitality and leisure, up to a cap of £110,00 per business. The small business rates multiplier has been frozen.

• Alcohol duty will be uprated in line with RPI, except for most drinks sold in pubs. Alcohol duty is to be cut by 1.7% for draft alcohol sold in pubs

• Fuel duty will be held at the current level for one year and extending the temporary 5p cut to 22 March 2026

• Tobacco duty - Renewing the tobacco duty escalator which increases all tobacco duty rates by RPI+2% plus an above escalator increase to hand rolling tobacco (totalling RPI+12%). Introducing a new vaping duty at a flat rate of 22p/ml from October 2026, accompanied by a further one-off increase in tobacco duty to maintain the financial incentive to choose vaping over smoking

• Soft Drinks Industry Levy - the Soft Drinks Industry Levy will increase over the next five years to account for inflation since it was last updated in 2018, and the duty will also rise in line with inflation every year going forward

• Retail crime - The Chancellor has committed to additional funding “to crack down on organised crime which targets retailers.” The government will scrap the effective immunity for low-value shoplifting below £200

• Inheritance tax exemptions on farmland - The highest rate of relief will continue at 100% for the first £1 million of combined business and agricultural assets on top of the existing nil-rate bands. The rate of relief will reduce to 50% after the first £1 million.

• The agricultural budget has been committed to be at £2.4bn for the next two years

IGD opinion

Many key policy elements were described in the Labour election manifesto or otherwise trailed in advance and so there are relatively few major surprises.

However, this budget marks a change in approach compared to the previous government. With the Budget forecast to raise £40bn in taxes, it marks the biggest tax-raising budget since 1993. The government will be hoping that the significant increase in public sector investment, particularly over the long term, funded through increased borrowing, will help to boost economic growth.

It is important to note that the government has yet to set out their intentions to reform the planning system, often deemed as a critical barrier to economic growth in the UK.  The government will hope that changes to the planning system can help drive economic growth faster than currently forecast.

For food and drink businesses, an increase in the cost of labour, driven by changes to NI and the NLW could be problematic – and likely inflationary, given the low margins of many businesses. This will particularly impact businesses in the hospitality sector. It will be of some comfort that there is relief for the smallest businesses.

It is also welcome that business rates relief has been extended, albeit with a lower discount rate. Therefore, many businesses will see their rates bill rise next year.  Over the longer term, the commitment to business rate reform will be impactful for businesses.

Businesses across the food system have been calling out for more support to tackle retail crime. The announcements by the Chancellor will be welcome.

For consumers, there is unlikely to be a significant increase in spending on food and drink in the short term. Household incomes are likely to remain constrained, particularly for those with low to medium incomes. The OBR has assumed that in 2025-2026 that “firms pass on 60% of higher costs (due to higher NICs) to workers and consumers via lower wages and higher prices.”

We will provide a more in-depth analysis of the economy, consumer sentiment and outlook for government policy in our next Viewpoint report due out 14 November. Be the first to receive our free report by registering here.