The Growth Series
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Economics 101: Spring Budget – No rabbit in the hat

By Max Shepherd, Group Economist at Accord MortgagesMaxshepherd-2

Overview

On 6th March, Jeremy Hunt presented his Spring Budget to the nation, laying out his latest fiscal plan ahead of the general election later this year. The Chancellor again found himself in a tight spot, with limited fiscal headroom, a historically high tax burden and strained public services. 

The Budget was very much in line with market expectations, with no real surprises within it. The market reaction was therefore muted, and the Budget isn’t expected to alter the macro-economic environment in a material way.

The general election is widely expected to be in autumn this year, so the Chancellor may have one final chance to sway voters ahead in an Autumn Statement later this year. An election before autumn is still a possibility, but unlikely given the Conservative Party’s current standing in the polls.

Background

Since the Autumn Statement, there are several economic indicators which have moved in the right direction for the Chancellor. 

Inflation has continued its slowdown, with the latest data indicating annual price growth of 4%, compared to 4.6% at the time of the Autumn Statement. Furthermore, the current expectation is that inflation will reach the 2% target by spring this year, considerably faster than previous expectations. 

In November, the Bank of England (BoE) expected inflation to reach the 2% target by the end of 2025. 

Unemployment remains low and, according to the ONS, it has in fact fallen since autumn from 4.2% to 3.8%. The unemployment data has to be taken with a pinch of salt, however, as the methodology to produce the data has been in a state of flux since October 2023. 

Both the ONS and the BoE have cautioned users of the data that there is notable uncertainty with the figures, and a new methodology will be used from September this year. 

Wage growth is slowing gradually, although growth remains positive in real terms (after accounting for inflation – which is good news for workers). High wage growth is one of the sticking points for the BoE, preventing them from cutting interest rates, so a reduction in wage growth is a good thing if you want lower interest rates. 

The thorn in the side of the government from a narrative perspective is the data released last month showing the UK was in a technical recession at the end of 2023. This of course doesn’t look great for a government who are promising higher productivity and higher growth, but equally it is the smallest of possible recessions – a 0.1% contraction in Q3 and a 0.3% contraction in Q4.

With this economic backdrop in mind, the Chancellor announced a Budget with the primary aim of stimulating growth, without reversing the progress made towards reducing inflation. 

The main challenge this time around, similar to the challenge faced when drafting the Autumn Statement, was the lack of ‘fiscal headroom’ (or in other words, spare cash) for the Chancellor to play with. 

One of the government’s fiscal rules is that debt as a percentage of GDP is falling in five years’ time. The fiscal headroom is any spare capacity the government has over what is required to meet that rule. 

After this Budget, the headroom is estimated by the OBR at only £9bn, which is tiny relative to overall government spending, which is currently around £1,200bn a year. This is an ongoing challenge for this government and any future government, and highlights how tough the fiscal landscape has been for politicians in recent times.

Because of this, the tax cuts announced in the Budget have been funded to an extent by tax rises elsewhere, despite the tax cutting narrative in Hunt’s speech.

Key policy announcements

  • Cut to National Insurance for employees by another 2 percentage points. This will come into effect from 06 April 2024.
  • Fuel duty frozen for another year.
  • Alcohol duty frozen for another year.
  • British ISA (extra £5k ISA allowance for investing in UK stocks).
  • An excise duty on vapes to be introduced in 2026.
  • Reducing higher rate capital gains tax from 28% to 24%.
  • The sunset clause windfall tax on oil and gas companies will be extended until 2029.
  • The Non-Dom system will be reformed to a modern, residency system.
  • Child benefit high income threshold to increase to £60,000.

Impacts

As mentioned in the overview, the Budget has limited implications for the economy. The OBR have uplifted their GDP forecasts slightly (and look very optimistic compared to other forecasts), and there could be a minor increase in inflation from cutting National Insurance (NI). 

Despite the cut to NI in both the Autumn Statement and the Spring Budget, personal taxes are still rising in nominal terms due to the personal tax thresholds being frozen.

The net impact of the NI cuts alongside the thresholds being frozen equates to an estimated £20bn more tax revenue a year by 2028-29. The other announcements will only have a marginal impact on the economy overall.

There were no policies announced for first-time buyers, despite the rumours circulating in the run-up to the budget.

Summary

In summary, the Budget was pretty unremarkable. The Chancellor has produced a sensible Budget considering the challenges he is facing and is perhaps keeping his powder dry for the next Autumn Statement, assuming there is not a general election before then.

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