George Square Financial Management in Conjunction with Albemarle Street Partners Budget 2024 Commentary
Jeremy Hunt’s Pre-Election Budget: Modest changes designed to re-build a reputation of economic credibility.
Chancellor Jeremy Hunt had a mandate in this budget to recover the Conservatives’ position in the polls. Only the week before his party fell to just 20% in an IPSOS Mori poll, the lowest ever seen.
His response was a classic Conservative approach from a chancellor who believes in his heart that low taxes are the best election winning strategy.
The centrepiece of the announcements was a plan to cut employees’ national insurance by 2p; backed the following day by the strong suggestion that the Conservatives’ election manifesto will promise to abolish the remaining 8% rate altogether.
A key goal here is to encourage people back to work, particularly because some 900,000 vacancies exist for jobs in the UK which is holding back the economy. Marginal changes to tax can, if targeted well, result in significant changes to people’s willingness to work if they tilt the numbers in their favour.
This bet, though, comes with an unfortunate backdrop. Overall, the independent Office of Budget Responsibility (OBR) was clear that the tax burden is still growing to the highest ever level. This is principally because the tax bands which dictate whether individuals pay basic or higher levels of income tax have been frozen for years ahead. As time goes by, this bites hard into household incomes in a period of inflation but was viewed as essential to bring down the national debt burden following the loss of confidence in the UK bond market that occurred after the Liz Truss premiership.
In contrast to Truss’s brief period of leadership, this budget was strenuously sensible. It was designed in close collaboration with the OBR (who Kwarteng famously chose to ignore). The level of co-ordination here is unusual and is designed to show the financial markets that the failures of that time are behind us.
By working closely with the OBR Hunt was able to persuade them to endorse his belief that some tax cuts actually save the government money because they encourage people to create economic growth. Economists call this phenomenon the ‘Laffer’ curve. Hunt’s joke that both the Treasury and the OBR had discovered their ‘inner Laffer curve’ is probably not a catchphrase that will work on the side of an election bus, but he was proud of it nonetheless. It is genuinely very unusual for the OBR to accept this argument and represents a considerable political accomplishment for him. It remains to be seen, of course, whether his core belief - that it is tax cuts which the British people crave - will prove correct, or whether at a time of very high waiting lists for public services the Labour focus will appeal more.
The economics
The budget comes accompanied by updated forecasts for the UK economy and there was little good news here. The economy is predicted to grow at 0.8% this year, rising to 1.9% in 2025. This is lacklustre at best. Accompanied by this there was acknowledgement that Britain’s bounce back from the pandemic has been weak, only getting back to where we started next year. At the heart of the problem here is productivity; the growth in the amount of output per person has not been seen at anywhere near the rates that governments target.
The proposals Child benefit
Aside from the flagship national insurance cut, the biggest surprise in this budget was raising the threshold at which parents lose child benefit from £50,000 to £60,000. He is also consulting on plans to better support single parents who, if they fall just above the cap in earnings, can be disadvantaged against two parent families who could earn £49,999 each and still keep the benefit. This has long been understood by all political parties as an obvious unfairness, but has proved administratively complex to change. Hunt may have gambled that the problem will be technically harder to solve than is possible on a quick timeframe, but that signalling his intent does enough to win votes.
Non-Dom tax
The concept of non-dom tax status, where people live in the United Kingdom but technically ‘domicile’ themselves overseas, has been tricky for the Conservatives for many years. However, it became more so when it was discovered that the then chancellor Rishi Sunak’s own wife was non-dom whilst living in the flat above Downing Street. The argument has always gone that getting some tax from the very wealthy rather than none is better for the economy and that scrapping the regime would not actually raise any money. Whether this is true or not, it has widely been understood as unfair and all major parties now agree on abolishing the 200-year old system for one based upon residence alone. Those moving to the UK will, under the new proposals, enjoy a four-year period of not paying tax on non-UK income but from year five will be subject to the same tax regime as everyone else.
British ISAs
The chancellor has announced a new option to add a further £5,000 into an ISA if that money is invested in UK shares. This offers a clear benefit to investors but does of course pose some broader questions: How has the UK stock market moved from being the envy of the world 10 years ago to a position where ordinary retail investors must be coaxed into owning the shares through tax breaks?
The answer of course is that London is now proving a far less attractive location for listing new companies during the period that it has sought to find its feet after Brexit. The government is searching for ways to rejuvenate the market by making it easier to list big global companies in London. In the meantime, though, smaller and medium-sized companies need all the help they can get to secure the capital to grow in the United Kingdom and the index of medium-sized UK companies, which is likely to experience the biggest boost from the policy, rose 1.4% on the news.
Property tax
The chancellor has removed the favourable tax regime for those who let out fully furnished holiday lets. This is in the hope that rural communities, particularly in holiday hotspots like Cornwall, will see more renting options come on the market for longer periods of time for local residents. Politically, this is a key issue in constituencies in the South West in which the Conservatives are locked in tight battles. The overall capital gains tax rate for residential property owners was however cut from 28% to 24%.
What was not in the budget?
The Conservatives’ right-wing faction has long argued that abolishing inheritance tax could be the key to electoral success. Jacob Rees-Mogg famously suggested canning transport spending in the North of England to fund it. Hunt however has not made this decision, concluding perhaps that it would alienate as many people as it would please. More moderate Conservative voices may argue, though, that even if it is not abolished, the threshold at which people pay inheritance tax of £325,000, which has not grown for 15 years, could have been moved.
Final word
This was a modest budget designed to demonstrate fiscal credibility and position the Conservatives as a low-tax party despite the obvious challenge that the overall tax burden is still rising. Whilst this is certainly the last budget before the general election, it is possible that there will be another ‘fiscal event’ in the form of an Autumn statement. If the Conservatives do plan to call an election at the end of this year, then they may well be hoping that they have a least one or two rabbits left in their hat for that stage. The likely direction of this has been signalled in the form of the possible abolition of national insurance, but only time will tell what actually happens.
