Infrastructure and the autumn budget: investing for the future?

In its 2024 Manifesto (the "Manifesto"), as highlighted in our post-election Infrastructure Spotlight, the Labour Party made some ambitious commitments towards accelerating the UK on its path to net zero, in addition to overhauling and regenerating the UK's ageing infrastructure, by using public investment "to crowd in private funding".

Although there have been several announcements related to infrastructure since Labour came into power in July, the biggest test of Labour's resolve on these ambitions came earlier this week when the Chancellor, Rachel Reeves, delivered Labour's first budget (the "Budget") since the spring of 2010. Reeves began the Budget by committing to "invest, invest, invest" to promote growth. And thereafter, whilst the Budget may have not set the pulse racing for the infrastructure world, it did deliver on (at least the next steps of) many of those Labour commitments. We discuss the key takeaways for infrastructure below. For further information about the Budget more generally, please see our analysis available here.

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Change to fiscal rules

During the Budget, the Chancellor formally confirmed that there would be a change to UK fiscal rules to fund extra investment (through increased borrowing). This change was first announced ahead of the Chancellor's trip to the International Monetary Fund ("IMF") annual meeting earlier in October, in order to provide the markets with plenty of advanced warning and avoid any potential panic.

The fiscal rule change will see government assets included in the UK's measure of debt – called 'public sector net financial liabilities'. This is a broader measure of the UK's balance sheet than public sector net debt and includes financial assets and liabilities such as student loans and stakes in financial institutions. The idea behind the change is to provide the Government with extra room to borrow (and still have debt falling as a proportion of GDP).

At the IMF meeting, the Chancellor emphasised that the Government would use public investment to boost investment in the net zero transition and upgrade infrastructure and, during the Budget, the Chancellor pledged to prioritise long-term funding for growth, with an increase of over £100 billion in capital investment over the next five years "across roads, rail, schools and hospitals".

What major projects got the go-ahead and which sectors received additional funding?

When it comes to specific projects, there were some losers. Prior to the Budget, the Government signalled that there would need to be cuts to certain infrastructure projects, so that others could move forward. So, some projects have now been axed, including £1.3bn of funding committed by the previous government for the creation of an exascale supercomputer at the University of Edinburgh and shelving a £2bn plan to build a two-mile tunnel close to Stonehenge (to ease traffic congestion).

But otherwise, the Budget confirmed that many of the expected winners will indeed be getting backing. In this sense, there does seem to be a continuing commitment to an interventionist, investment focused role of government in the energy transition in particular, as discussed in our recent Sustainability Insights briefing. Backed projects and initiatives included:

National Wealth Fund ("NWF")

Previously known as the UK Infrastructure Bank, the NWF has been re-purposed to support the Government's wider industrial strategy. It was emphasised in the Budget that the NWF will help to catalyse over "£70 billion of private investment". During the International Investment Summit (which was held in October), it was confirmed that the NWF would be initially capitalised with £27.8 billion – with £5.8 billion of the NWF’s capital focusing on green hydrogen, carbon capture, ports, gigafactories and green steel. We still await further details on the NWFs strategy in deploying that capital and its role on infrastructure projects in particular (this is being considered by one of the many new taskforces being set-up by the new administration) but if properly structured and purposed, it does seem to have the potential to unlock large scale investment in infrastructure, in a genuine public-private partnership, in a way its predecessors have not quite managed.

Great British Energy ("GBE")

GBE was announced prior to the election – as a publicly owned investment platform (working alongside private partners), co-investing and managing green technologies and capital-intensive projects. The Government stated as part of the Budget that GBE would receive £100 million capital funding in 2025 and 2026 for clean energy project development. It was also noted that, once GBE is fully established, its investment activity will be undertaken by the NWF – suggesting that these two organisations will be working closely together in the energy sphere. The remit and role of GBE (the enabling legislation for which is still working its way through parliament) is markedly unclear at this point, and further details are keenly awaited. We anticipate one key element of its role could be working with the Crown Estate to help identify and de-risk public development land (helping pilot energy projects through early, expensive and high risk consenting stages, then recouping that investment when private capital crowds into the de-risked project on competitive terms) – but this very much remains to be seen.

Carbon capture, Usage and Storage ("CCUS") and hydrogen

The Government has pledged to provide £3.9 billion of funding across 2025 and 2026 for CCUS 'Track-1 projects' (HyNet North West and the East Coast Cluster). Earlier in October, the Government announced up to £21.7 billion of "funding available, over 25 years, to make the UK an early leader in 2 growing global sectors, CCUS and hydrogen" – and its inclusion in the Budget highlights that the sector will continue to receive support from the Government, even when some remain sceptical of the future importance of these technologies. This has the feel of a compromise between the more 'Net Zero' and 'Industrial' focused factions of the Labour administration – as CCUS provides an opportunity to enable heavier industrialisation to scale in the near term without a large carbon cost.

Automotive and electric vehicles ("EVs")

It was announced prior to the Budget that the Government was committed to phasing out new fossil-fuel only cars by 2030 (reversing the previous Government's pledge to extend this deadline to 2035). As part of the Budget, the Government confirmed that over £2 billion (in the next five years) would be used to support the automotive sector including EV manufacturing – which includes £200 million for the EV chargepoint rollout.

It was also confirmed that UK Export Finance, the UK's export credit agency, will now be allowed to provide funding to UK companies supplying critical minerals in relation to EV battery production (and other sectors).

Fibre

The Government has pledged to invest at least £500 million over the course of the next year in 'Project Gigabit' and the 'Shared Rural Network'. This funding is aimed at providing full gigabit coverage in the UK by 2030. This forms part of the Government's wider research and development efforts – with a total level of Government investment of £20.4 billion in research and development over the coming year.

Infrastructure for Homes

As part of the Budget, a new housing package was announced, which included £500 million in new funding for the Affordable Homes Programme, increasing it to £3.1 billion. The Government has been very focused on unlocking the planning system to enable the development of more housing in the UK, but as part of the construction of new homes, new infrastructure is always needed – and this has been recognised as part of the UK's new industrial strategy (discussed in further detail below).

There was no mention of the Future Homes Standard in the Budget, however this is still expected to come into force in 2025 – and Labour have stated that they "fully support the need for low carbon homes and will review proposals and feedback from the future homes standard consultation in due course". As a result, we anticipate the drive for new homes will create significant opportunities for low or zero carbon infrastructure in particular – including heat pumps and district heat networks.

Other notable projects

It was confirmed that HS2 (running between London and Birmingham) would not terminate at Old Oak Common, but that the necessary tunnelling would be funded to ensure that it ran all the way to Euston. The Government also confirmed that the TransPennine Route Upgrade between York and Manchester and the East West Rail (connecting Oxford, Milton Keynes and Cambridge) would go ahead. £2.7 billion of funding was also confirmed to continue Sizewell C’s development through 2025 and 2026. A final investment decision, on whether to proceed with Sizewell C, will not be taken until phase two of the spending review. While there was no specific additional funding allocated for Great British Nuclear's small modular reactor competition, the Budget did confirm this remained ongoing – with the final decision to be taken in spring 2025.

What about net zero?

While there was not a great focus on net zero initiatives, nor the energy transition more generally, in the speech delivered by the Chancellor before Parliament – the full Budget publication mentions several announcements that have already been made by Labour since July in relation to net zero, including reversing the de facto prohibition on onshore wind in England, the approval of four major solar projects and increasing the budget for the sixth contracts for difference allocation.

With that said, and as noted above, new announcements have been made in relation to GBE, CCUS, EVs and increasing the UK's nuclear capabilities. There was also a commitment to provide support for the first round of electrolytic hydrogen production contracts, extending the sustainable aviation 'Advanced Fuels Fund' for a further year and promising to "capitalise on UK clean energy strengths through the new industrial strategy" – discussed in further detail below, which suggests the net zero transition remains important to the new administration. And so, whilst there is a sense of the Budget being rather anti-climactic on climate, there is still plenty of reason for optimism when it is placed in the wider context of the administration's early work.

In addition to the above, prior to the Budget, Labour confirmed that their proposal for a 3% increase to the existing Energy Profits Levy (the "EPL") on oil and gas companies would be going ahead. The EPL was first introduced as a response to high profits in the sector back in May 2022. From a starting point at 25%, the previous Government increased the EPL to 35% in January 2023 (remaining in place until March 2029), with Labour confirming in the Budget that the levy would increase to 38% from 1 November 2024 (and would remain in place until 31 March 2030 – unless oil and gas prices drop below a certain level for six months).

What might be coming next?

Prior to the Budget, the Government published its industrial strategy 'green paper'; titled Invest 2035: the UK's modern industrial strategy (the "Green Paper"). The purpose of the Green Paper is to provide a preview of the Government's approach to the building of a full industrial strategy, which is due to be published in spring 2025. The last major UK industrial strategy was published back in 2017 – although as pointed out in the Green Paper there has been ten separate strategies, growth plans or similar assessments since 2011.

The Green Paper states that the purpose of the new industrial strategy is to provide a "10-year plan to deliver the certainty and stability businesses need to invest in the high growth sectors that will drive our growth mission". Crucially, this will involve capturing a greater share of "internationally mobile investment", providing yet further evidence that the Government will not be shying away from bringing further private investment into infrastructure projects in the UK.

In total, eight "growth-driving" sectors have been identified (as requiring further investment), which include advanced manufacturing and clean energy industries – and the Government's priority before the white paper is published next year is to identify subsectors where there is evidence that changes in policy can address barriers to growth, which is aligned with the UK's approach to net zero and the environment (and will also promote regional growth and economic security).

We will have to wait until next year until further details are published – however the Green Paper already contains plenty of information for infrastructure investors to think about when considering the UK as a future investment opportunity. Given this and the Budget, it appears that the new Government is taking steps to reinvigorate the infrastructure sector in the UK, while still prioritising the net zero transition. However, investors will be wary of how soon changes can be unlocked in relation to identified barriers (such as planning, skill shortages and regulatory uncertainty) and the risk the Government could become more focused on delivering public facing services at the expense of larger infrastructure investment if the political sands shift again in unstable times.

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