It's not easy being a Chancellor in the run-up to the next election, looking to balance a look of fiscal responsibility against blatant pre-election giveaways. While there were a few headline-grabbing moves, there were no big surprises or giveaways, and it looks like it will be a tricky few months for the Conservative Party.
That said, the Labour Party have already confirmed they won’t vote against the budget, which included a few of their own pre-election policies, leaving them in a difficult place. How would they raise extra funds in government?
The economy
The Office for Budget Responsibility (OBR) was a little more upbeat on the economy than many had expected. The UK economy is forecast to grow by 0.8% this year, 1.9% next year and 2% in 2026 but after that, a fall to 1.8% in 2027 and 1.7% in 2028. Assuming the election is called this year, even if towards the end of the year as opposed to May as many had suspected, the next government will be in a very challenging economic environment.
While we await the February inflation figures, due on 20 March, the January figure was encouraging, falling to 4%. Compared to the 40-year high of 11.1% hit in October 2022, this is certainly a significant improvement. It would appear there is more improvement to come, with inflation set to fall to below 2% by the end of June and 1.5% by the end of 2025.
Taxation
Those who follow the financial press will be aware that the 2p reduction in the national insurance rate was well-flagged. There were also suggestions of a potential income tax cut, funded by reduced public service spending, but this appears to have been a step too far even for Jeremy Hunt. So, will the electorate feel the benefit of two successive national insurance rate cuts?
Unfortunately, if OBR expectations of a considerable increase in council tax plays out as expected over the next five years, this will negate the benefits of reduced national insurance payments and more. Looking towards income tax, while there have been no changes of late, we have seen a freezing of the tax bands, a ticking timebomb according to the OBR.
By the tax year 2028/29, 2.7 million more people are expected to be in the higher tax band, and a staggering 3.7 million people will be paying income tax for the first time. This is the result of so-called "fiscal drag," with tax bands frozen and even modest wage inflation increasing the government's income tax take, pushing many into higher tax bands.
Investment
Again, after another well-orchestrated leak, the Chancellor confirmed the introduction (after a consultation paper) of the “UK ISA”, allowing investors to protect an additional £5000 a year from tax by investing in British companies. This is just one of several measures to encourage UK-based and overseas companies to float on the London Stock Exchange. While a helpful addition to the existing £20,000 ISA allowance, is it a game changer?
Elsewhere, the government announced a reduction in the higher rate of tax paid on profits from selling property, down to 24% from the current 28%. On the flip side, tax benefits for those owning holiday lets and stamp duty tax breaks for those purchasing multiple properties in England and Ireland will soon be removed.
Summary
As inflation continues to fall, it is undoubtedly only a matter of time before interest rates follow suit – one of the more promising headlines from the budget. However, despite a further reduction of 2p in national insurance contributions, personal taxation in the UK is moving higher into record-breaking uncharted territories. This begs the question: if a pro-tax cut Conservative government cannot deliver fiscal relief to the electorate, where does this leave a potential incoming Labour government?