Short Term Gains, Long Term Pains? - Atticus Partners’ Preview of Spring Budget 2024

04/03/2024

This Wednesday, the Chancellor will unveil the 2024 Spring Budget. Most likely this will be the Government’s last fiscal statement before the election, and given its an election year, the Budget has been shrouded by speculation over tax cuts and Government giveaways as Prime Minister Rishi Sunak scrambles to make up polling ground on Labour.

Meanwhile, economic experts and financial institutions have warned against a short-term approach to managing an economy beleaguered by long-term challenges. It is in this context that Chancellor of the Exchequer Jeremy Hunt will present his economic plan in a pivotal year for British politics. 

No longer inflation nation?

Sunak’s trump card as he enters Budget season is his proclaimed victory in his first priority as Prime Minister: halving inflation. By the time he entered office in October 2022, inflation had soared to over 10% and triggered a painful cost-of-living crisis, brought on primarily by a culmination of unwelcome factors including the aftermath of the COVID-19 pandemic and Russia’s invasion of Ukraine.

After a year of keeping the purse strings tight Sunak declared victory in late 2023 as inflation more than halved and has now stabilised at around 4%. This, however, is still twice the level of the ideal 2% recommended by the Bank of England, prompting Shadow Chancellor Rachel Reeves to assert “now is not the time for Conservative ministers to be popping champagne corks”. It is also difficult to distinguish how much of this fall can be attributed to Government policy, and how much was the result of global trends like falling energy prices. Nevertheless, Sunak will argue this achievement vindicates his economic policy and warrants more freedom and flexibility in this year’s Budget.

Party of low taxes?

Sunak is under immense pressure from many of his colleagues in the Conservative Party to return to the Party’s traditional roots of low taxes and minimal regulations. In September the Institute for Fiscal Studies (IFS) crowned the current parliament as the highest tax-raising one on record, with UK tax revenues rising from around 33% to 37% of national income between 2019 and the next general election. 

The Chancellor already fought to change this perception in last year’s Autumn Statement, where he announced a cut in the main rate of National Insurance from 12% to 10% from the start of this year as well as what he described as the “biggest business tax cut in modern British history with the most competitive investment allowances of any large economy”. 

The Prime Minister confirmed at the start of the year that he wants to “keep cutting taxes” and there have been rumours he would go as far as scrapping inheritance tax, with Defence Secretary Grant Shapps recently branding the tax as “punitive and unfair”. Though the Government has since distanced itself from these rumours, there are still several options for tax cuts on the table, with moderate Conservatives from the One Nation wing of the Party hoping that they will be designed to alleviate stresses on the “squeezed middle” class.

How much could we save?

The economic think tank Resolution Foundation (RF) has weighed up the Chancellor’s options for personal tax cuts. At a cost of £7 billion, the Government could cut income tax by 1% to save those who are earning £20,000 a year £74, and £374 for those earning £50,000. Meanwhile, a 1% cut to national insurance contributions would produce the same relief at a lower cost to the Government of £5 billion, and therefore may potentially be the preferred option for a tax cut.

However, the RF stressed that either of these tax cuts would come in a “tax-raising sandwich”, stuck between previous increases already in effect and further tax rises to come in the coming years.

The UK tax burden is therefore set to hit a record high, regardless of whether these cuts are pursued. This is primarily due to the personal allowance freeze – the ‘stealth’ tax that will generate £44 billion a year for the Government by the years 2027-28. The RF concluded that cancelling the personal allowance freeze for 2024-2025 would come with a similar price of £7 billion for the Government, but save both those earning £20k and £50k an evenly spread sum of £252.

Who will pay for this?

Analysts like Capital Economics estimate that the Chancellor comes into the Budget with £15 billion of fiscal ‘headroom’ (the leftover space between expected government revenue and its existing spending). Though this is higher than expected, it remains far lower than the £27 billion of headroom that chancellors have had on average since 2010. 

So if the Chancellor wishes to cut taxes while meeting a broad range of other new cost pressures, the money may need to come from somewhere else. New duties may be announced on importing and manufacturing vapes in an aim to make the habit unaffordable for children, while raising £0.5 billion by 2028-29, but these will hardly go far enough. 

Instead, public services spending may be in the firing line, despite many experts advising against depriving funding from services that are already “struggling”. The Institute for Government (IFG) has warned of the “deterioration in performance that they imply – particularly in the criminal justice system and local government”, while the Health Foundation stated that the “consequences of short-term thinking are stark” for social sectors like health, care, and housing. These services are already afflicted with high inflation, high demand and high funding pressures, and further cuts could send them over the edge. 

Final thoughts

There is a precedent of governments using the budget before elections for last-minute giveaways to the voters, and this year is set to be no different. Armed with some financial wiggle room and aiming for a boost in the polls, the Chancellor is poised to introduce tax cuts that offer welcome, short-term relief for a nation still reeling from the cost-of-living crisis. But dig a little deeper and these top-line savings are eroded by stealth tax hikes and strains on public services that together may spell trouble further down the line – though by that time, it will be for the next government to deal with.