Budget 2024: True North Analysis

True North’s expert advisors share their analysis on today’s budget.

Labour’s positioning: A chance at a reset

Analysis from Andrew Liddle, Senior Advisor at True North

Government has not been easy for the Labour Party.

Rows about freebies and donations have dominated the headlines. Factional infighting inside Downing Street has hampered delivery. Just months after a landslide victory, Sir Keir Starmer’s personal ratings have plummeted, with many Labour MPs quietly wondering if this might be a one term government after all.

Rachel Reeves’ job with her budget was therefore not only to repair the public finances, but also to restore confidence in the Labour Party’s ability to govern – and in this latter respect the first female Chancellor of the Exchequer has largely succeeded.

While the headline budget figures – tax rises totalling £40billion – are brutal, the detail has given Labour MPs some cause for hope. Economic growth, while modest, is nevertheless likely over the next few years. Inflation is due to continue to fall. Meanwhile, important government departments – such as health and education – are getting a spending boost and thereby avoiding the dreaded return to austerity many Labour MPs feared.

The picture in Scotland, where Labour is hoping to make gains at devolved elections in 18 months, is more mixed. Party strategists will hope an additional £3.4billion in Barnett consequentials for the Scottish Government will help restart Labour’s stalled recovery in Scotland, but headline tax rates on the oil and gas sector will continue to prove controversial.

Barely 100 days into government, there is no doubt the Labour Party remains in a tricky position, but with her statement Reeves has offered, at least, a chance at a reset.

What’s next for the Scottish Government?

Analysis from Dr Eilidh Whiteford, Senior Advisor at True North

If today’s UK Budget Statement was high stakes for the new Chancellor Rachel Reeves, it was also high stakes for First Minister John Swinney. The Scottish Government, facing unprecedented financial pressures, will be crunching the numbers in the Chancellor’s Budget Statement in detail to work out whether her big spending plans for public services (both for day-to-day spending and for much-needed capital expenditure) will provide the Holyrood administration with enough financial head-room, through Barnett formula consequentials, to meet their existing spending commitments and pursue their own re-oriented policy priorities with enough change left over to buy-off Green support for their budget in a few weeks’ time.

However, there is really no guarantee that John Swinney’s government will be able to get a budget through parliament. While Swinney and Forbes will be much less inclined than their predecessors to capitulate to an expensive Green wish list, they may have little alternative. They will also be very reluctant to call the Greens’ bluff; their erstwhile partners cannot be relied upon to make a politically savvy decision. It is far from clear that the Greens, still smarting from the unceremonious ending of the Bute House agreement, actually want to continue propping up the SNP in office. If the Scottish Government can’t get its budget passed, we could be looking at an unscheduled Holyrood poll in the Spring.

Back in July, Labour would have welcomed a snap Scottish election with relish. They will be a lot less bullish now. The Starmer government has squandered much early goodwill, not least through their cack-handed introduction of means testing for pensioners’ cold weather payments. Early gaffs have inflicted more damage on Labour’s Holyrood hopes than they would care to admit; they will be hoping that some of the Chancellor’s announcements today will help restore their electoral hopes ahead of 2026. The new Scottish Conservative leader Russell Findlay, meanwhile, will wish to establish himself a bit more firmly before he faces an electoral test. With the UK party still leaderless, adjusting to opposition and the threat posed by the emergence of Reform as a serious electoral threat, the Tories will probably be quite content to let business drift at Holyrood for the next 18 months or so. But even if the opposition parties don’t want an early election, they are unlikely to throw the SNP a lifeline. Things could get interesting over the next few weeks.

Budget bids to make the windfall tax work

Analysis from Allister Thomas, Senior Energy Advisor at True North

The North Sea has been braced for a tough budget. Rachel Reeves has made an important concession on capital allowances, but challenges nevertheless remain for the sector.

First, the good news…

The capital allowance (100% first year allowance) is being retained. After some warnings this would be reduced, keeping operators up at night, its retention is a lifeline for certain projects. Companies will now be crunching the numbers, but firms were pushing for this key measure to be retained given the capital-heavy nature of the industry.

But the EPL is going up and lasting longer

Overall, however, the headline tax rate has been increased 3% to 78% (38% EPL), the 29% investment allowance for firms to offset costs has been scrapped, and the levy has been extended until the sunset clause of 31 March 2030. With windfall profits long-gone, and another five years (at least) under this fiscal regime, investment in the North Sea could still be a tricky proposition. IOCs will be weighing the North Sea against global portfolios competing for investment, independents, requiring funding and partners, may well continue to see challenges.

In the run up to this, the industry warned that tens of thousands of jobs and billions of pounds of investment were at risk. Capital allowances are a concession to mitigate some of that, though this remains a tough budget for the industry. The price floor will stay in place, though it is cosmetic; consensus is that commodity prices won’t fall low enough for long enough to trigger it.

Operators will now be assessing the true the scale of the impact. In the last week, leaks to Reuters saw a report that Harbour Energy, the UK’s largest producer, is planning to sell its assets in the UK North Sea, while Viaro Energy, which recently struck a deal for 11 Shell North Sea assets and part of the Bacton Terminal, reiterated concerns that Labour’s policies will accelerate an end to producing assets.

Successor regime?

Can the industry now expect certainty? Will the system truly end in 2030? Given this is the fifth fiscal change since May 2022, operators would be forgiven for taking a cautious approach. The government is consulting on what happens post-2030 should there be further price shocks, so a replacement regime may come into view.

Decarbonisation allowance but CCUS tax cut

A point of note from the red book: The decarbonisation allowance, applying to costs for the complex and costly process of electrification, is dropping from tomorrow (November 1) from 80% down to 66%. Despite this, the government says firms will be able to benefit from “broadly the same” level of tax relief as the EPL increases from 35% to 38%. What happens in reality remains to be seen. With a harsher tax rate, abolished allowances, increasingly non-profitable and ageing assets, operators may opt to cease production and decommission, accelerating the industry’s decline. The NSTA regulator said last week that more than 6 billion barrels of discovered oil and gas remain in the North Sea, but it also now demands any new projects to be electrified or electrification ready. This measure may mean those barrels risk being stranded as the UK increasingly relies on gas giants like the US and Qatar for its supply.

Staying on decommissioning and repurposing: the government is introducing a tax relief for repurposing assets for carbon capture, utilisation and storage (CCUS), to be legislated for in the 2024-25 Finance Bill.

Scope 3 consultation

Another major pressure on the industry: The government has today published a new consultation on Scope 3 emissions for new oil and gas projects, designed to deliver a “fair, orderly and prosperous” transition in the North Sea. This comes following the landmark Finch Supreme Court ruling earlier this year and the government’s decision not to challenge judicial reviews against new oil and gas projects.

Initial funding for GB Energy

Positively, today’s Budget outlines £125milion of initial funding for GB Energy from 2025-26. Though it remains a far cry from the £8.3billion mooted, this is a set up phase. Funding has also been announced for several hydrogen projects, including Cromarty and Whitelee in Scotland.

Ports, Wind, and Investment Zones

The Government has confirmed that Investment Zone programmes will continue, with a formal appraisal process and aiming for 25/26 completion. With Aberdeen already selected as one of those zones under the previous government, that’s a welcome move.

This budget does confirm some funding for Ports: £134million to support delivery of port infrastructure to facilitate floating offshore wind as part of DESNZ’ funding settlement, linked to development of new green hydrogen projects.

Apparently absent is any mention of the mooted £1.8billion for Ports and Harbours, laid out in Labour’s Green Prosperity Plan in April. Industry will keep a close eye for more detail on this funding will emerge in later Budgets.