UK Budget - no rabbit

In the last Budget before the general election, the UK chancellor Jeremy Hunt brought Parliament up to date with the story given to the media. Conservative MPs hoping that there would be a big last minute surprise, a rabbit pulled dramatically from the fiscal hat, were disappointed. They will have to be contented instead with the stealing of some of the opposition’s clothes.

The net stimulus in the 2024/25 financial year will be £14 billion, equivalent to roughly 0.5% of GDP, with smaller amounts in following years. The bulk of that election year ‘giveaway’ is accounted for by two measures: the widely-publicised two percentage point reduction in employee National Insurance contributions (£9 billion), and an extended reduction in energy duty (£3 billion).

The Office for Budgetary Responsibility (OBR) 2024 growth forecast is slightly higher (by 0.1 percentage point, at 0.8%) in 2024 than in November, while its inflation forecast is noticeably lower (by 1.4 percentage point, at 2.2%). Since these forecasts are net of today’s policy changes, arguably the underlying near-term nominal GDP outlook for 2024 has worsened, but not by a dramatic amount.

Contrary to some other media commentary, the OBR has not uncovered some sudden deterioration in the fiscal accounts. Its projections for government debt still show the net debt/GDP ratio, as in its November forecasts, peaking in 93.2% in 2026/27 and 2027/28. Given today’s policy changes, this suggests the OBR may even have been positively surprised by the government accounts, though as ever it hides any such surprise well.

Revenue projections do show the effective national tax rate sticking at high levels, but as with the wider debt arithmetic, these are not necessarily the stuff of which economic or financial crisis is made. We continue to suspect that the OBR is overlooking more positive scenarios in its analysis.

As we wrote last year in commenting on its gloomy 50-year (!) projections, long-term fiscal arithmetic is hugely sensitive to small compounded changes in two big numbers (that is, total revenues and expenditures). For an incoming government, there is everything to play for – if they have the economic savvy to see it.

Some specific policy changes will be material for individual investors, including (from 2026/27) the tougher stance on ‘non-dom’ taxation (a policy favoured by Labour), and cuts in the higher rate of capital gains tax on property. But overall, markets are (as usual, and so far) little moved by the policy changes and economic and fiscal forecasts. As we note often, the global business cycle in any case usually matters more to UK capital markets than what happens here.

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