UK: why next week's spring Budget is set to be underwhelming

UK: why next week's spring Budget is set to be underwhelming

Mar 01,2024
UK Chancellor Jeremy Hunt will outline his spring Budget next Wednesday. Here's what we know so far.
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On 6 March Chancellor Jeremy Hunt will deliver his tax and spending plans for the UK, in what is likely to be the biggest fiscal announcement before the next General Election.

The Budget comes not only against a backdrop of stifling tax burdens but also staggering public debt, placing the Treasury in a politically sticky position.

According to the Institute for Fiscal Studies (IFS), tax revenues as a share of national income in the UK are currently on track to hit 37.7% in 2028 to 2029, the highest level seen since World War II.

To alleviate this load, Hunt has been publicly planning for what he calls "smart tax cuts", notably facing pressure from the right of his party.

After the government cut national insurance contributions from 12% to 10% in November's Autumn Statement, the New Conservatives faction - Conservative MPs elected since 2016's Brexit referendum - is calling for more tax reductions, worth in the region of £24 billion.

While this may be a rosy prospect for many voters, a number of leading research institutes are calling for fiscal prudence.

The IFS has pointed out that, if the Treasury continues along its current trajectory, the UK would be borrowing at a rate of 4.1% of national income this fiscal year.

That is more than twice the borrowing rate seen in the years preceding the COVID-19 pandemic.

The International Monetary Fund has similarly warned Hunt against tax cuts, arguing that "fiscal consolidation" is needed to support growth and public investment.

The Treasury has a self-imposed rule that seeks to cut debt as a share of gross domestic product (GDP) within five years. 

In order to fulfil this requirement, the Office for Budget Responsibility (OBS) has said that Hunt will have around £13 billion of headroom to use in his Budget, although the Resolution Foundation has released an estimate of £23 billion.

New economic data from the OBR, due out on Friday, may impact the contents of next week's announcement.

"So much depends on the forecasts from the OBR which dictate how much money the Chancellor has to play with," said Laith Khalaf, head of investment analysis at AJ Bell.

"The positive effect of lower interest rates and inflation on the Exchequer's debt interest costs should not be underestimated."

What tax cuts could be announced?

Although predictions are subject to change, commentators have outlined some possible giveaways that may feature in the upcoming Budget.

Some believe Hunt will implement a further 1p cut to National Insurance, which would cost the government around £5 billion, whilst others have touted the idea of a 1p cut on the basic rate of income tax.

The Resolution Foundation has nonetheless warned that, even with these tax cuts, those on lower salaries would still be losing out.

Hunt announced last November that a freeze on personal allowance thresholds would last until 2028, meaning that lower earners are getting dragged into higher tax bands as inflation is pushing up their nominal wages.

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In other words, many workers are taxed as if they were earning more, when their purchasing power is actually being diminished.

Looking forward to next week, commentators have also predicted a cut to inheritance tax or stamp duty, a fee applied to the sale of property or land over a certain price.

In order to fund these concessions, there are rumours that Hunt may alter Britain's "non-dom" tax rules.

Non-domiciled citizens currently only pay tax to the Treasury on money earned in the UK, not on money earned elsewhere. Scrapping this scheme could raise an extra £3.6 billion a year.

According to The Times, Hunt is similarly considering placing an extra levy on vaping  products, which would help to line Treasury coffers while making vapes less accessible.

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Yet, even with these proposed initiatives, analysts are arguing that next week's Budget will struggle to offer significant concessions whilst remaining fiscally responsible.

"It doesn't look to me like we will have the same scope for cutting taxes in the spring Budget that we had in the Autumn Statement," Hunt told the BBC a month ago.

While the Conservative party is no doubt hoping to downplay expectations, it seems the Chancellor really does have limited room for manoeuvre.

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