Letter from London – Budget Review

March 7, 2024

Plenty of political hopes and fears have been invested in today’s Budget, which was probably the final set-piece financial event before this year’s UK General Election.

From the Conservative perspective, after two relentlessly gloomy years of economic and political pain, the run-up to this financial statement had been accompanied by optimistic expectations that it might contain electorally game-changing substantial tax cuts.  These have been been tempered by cold economic reality.  Rising costs in government borrowing and sharply lower tax receipts as inflation has rapidly fallen have sharply altered the fiscal landscape and the potential for substantial giveaways.

Meanwhile the Labour Party simply hopes to avoid being trapped into saying too much at this delicate stage in the electoral cycle;  its leadership will be avidly scouring the small print of the announcements made in the hope that its future room for manoeuvre is limited no further than the general economic and political climate already dictates.

Over the next few days renewed speculation about a snap spring election is likely to take centre stage. Unless, of course, the entire package is poorly received by its two equally economically literate audiences – the Great British public and the parliamentary Conservative Party.

It came as no surprise that Chancellor Hunt felt able to use the almost traditional sleight of hand that he now had some ‘fiscal headroom’ – at least under the arcane and self-serving rules that govern this sort of thing – to allow him some generosity with our money. As an astute and successful former small businessman he knows in his heart that the underlying state of the public finances remains dire.  Overall government debt and interest payments continue their inexorable rise to all-time historic highs.

But perhaps even more pertinent was the fact that in his financial statement only last November, Jeremy Hunt had  failed to take account of the impact on household finances of several medium term initiatives on public expenditure. The hope then was that a little sustained economic growth (which has sadly remained elusive) would tide the UK economy over. It has not.  So real terms reductions in government spending to the tune of £20 billion were already baked in – albeit to take effect in the tax year immediately after the election. This is at a time of already unprecedented public dissatisfaction with healthcare, the state of the public realm and educational provision. Unfunded promises abound –  from a universal desire to increase substantially defence expenditure to bolstering social care through local government finances and restoring the overseas aid budget.  Cumulatively much of this will act as a poison pill on the tax and spending plans for whichever any government is in office in 2025 and beyond.

The interests of those in work and the business community have once again been boosted by further reductions in National Insurance rates. This, rather than any change in headline income tax rates, was the centre-piece announcement and was accompanied by a series of relatively inconsequential if welcome measures over child benefit and fuel duty. The abolition of non-domiciled status marks a radical change of heart but the suspicion is that this was designed above all to wrong-foot the Opposition, which had already earmarked the fairly modest receipts from this measure in its own spending plans.

With some skill the Sunak/Hunt double-act has once again tried to balance the interests of the traditional, affluent Tory supporter base without irking the so-called Red Wall voters whose support in 2019 was such an important element of the near landslide Conservative election triumph. More questionable is whether there is at this point any real appetite beyond  the free-market fringe of the Tory Party (which is never easy to satisfy at the best of times) for substantial headline tax cuts than better funded public services.

History suggests that giveaway budgets in the run-up to a general election do not always go to plan anyway. Both Nigel Lawson in 1987 and Kenneth Clarke, almost a decade later, had the luxury of approaching an election with the UK economy growing robustly and plenty of money available for tax cuts. Lawson reduced corporation and basic rate income tax and the election was comfortably won. He held back, however, for a further year before making his iconic cuts in top rate income tax, which arguably contributed to the overheating of the economy and the recession of the early 1990s. Meanwhile Clarke’s pre-election reductions in basic rate income tax did nothing to prevent the government in which he was the finance supremo from crashing to a landslide defeat within months.

By the same token responsible stewardship of the economy is not always rewarded by the voters. Famously in 1970 Labour’s Chancellor, Roy Jenkins, declined to make his pre-election budget a tax-cutting affair and in its aftermath his party slumped to an unexpected election defeat. By contrast, but in keeping with his mantra of working to a ‘long term economic plan’,  George Osborne in a time of general austerity chose only to raise personal allowances, rather than reduce rates; nevertheless his party won an unanticipated victory at the 2015 election which followed.

Just in case you have come to the conclusion that the politics of financial management has become an especially cynical business only in recent times, it is worth remembering the two budgets of 1955. The first was held two months before the General Election of that year; flying in the face of economic commentators who warned that the economy risked overheating, its centre-piece was a sharp reduction in income tax as a pre-election sweetener to the voters by the then Conservative government. With the election safely won in May, an emergency budget was held in the October which promptly reversed all those income tax cuts and raised indirect taxes to cover the widely predicted and foreseen shortfall in the public finances. Perhaps that by-gone age was a little less golden than we remember it!

The relentless – and admirable – economic priority of the current government has been to tackle the level of consumer and household inflation before the damaging expectations of ever higher prices became embedded. This remains the focus of attention for central bankers and investors alike, given that interest rate policy and the market performance of bonds and equities are closely bound up with inflationary forecasting.  Data on consumer prices is available and published on a monthly basis, but UK policymakers have persisted with talking about inflation over an annual span. Whilst this evens out seasonal price variations it has also meant that Bank of England economists have arguably been behind the curve in capturing the impact of faster changing underlying trends.

In an election year, when politics and economics are so closely inter-twinned, this matters. Many in the government contend that the period of rapidly rising prices in the aftermath of the pandemic supply shock has already come to a halt; as a result they believe that the central bank should already have started loosening monetary policy. Businesses argue that maintaining interest rates at high levels (at least by the standards of the past 15 years) has impacted confidence, investment strategy and has ultimately become unwarranted check on economic growth.

This highlights a more general trend in recent times of overly pessimistic official forecasts. The dark shadow of apparent imminent recession has been a central element of many respected, politically independent predictions over the past two years and some of their gloom has become self-fulfilling. Whilst growth this year will almost certainly confound the doom-mongers once again, it is likely to remain fairly anaemic given the domestic crosswinds. Even if they snuff out the green shoots of sustained recovery, there are geopolitical risks that are already  quantifiable. We also live in an era of profound global uncertainty where there is little past experience on which to draw. From continued conflict and stalemate in Ukraine, to the perils of a more general Middle-Eastern conflagration seriously disrupting those commercial connections that the UK has painstakingly developed in the region to an untimely loosening of supply chains and diplomatic ties in the fast-developing nations of south and east Asia as China’s stranglehold in that region becomes ever more prevalent.

Less uncertainty surrounds overall levels of taxation and the longer-term challenge of tackling rising government debt in a future era when demand from an ageing population for healthcare and welfare is set to rise sharply.  It should not come as a surprise that the Labour Party is already insisting that it requires at least two terms in office (what it calls ‘the decade of renewal’). Its leadership  realises all too well that its opportunity to make the political weather over taxation or economic policy will be severely limited in the years ahead. Being buffeted by events and the mis-steps of your predecessors is never a good look for any political administration as Rishi Sunak will amply attest.

But the next government will also need to keep a continued eagle eye on inflation. Two of the less noticed reasons for the current government placing such strong emphasis on reducing its headline rate are that most pensions, welfare payments and gilts (the largest draw on public expenditure) are protected against inflation; in the meantime we in the UK have traditionally funded a higher proportion of our national debt through index-linked borrowing than other Western nations. As that debt-pile has tripled since the economic crisis of 2008, higher inflation hits us hard.

A final more parochial thought on this budget. Even orthodox and responsible Chancellors – and Jeremy Hunt is certainly cut from that cloth –  are keen to please their parliamentary troops and supporters. Hunt’s instincts were always to follow the siren call for tax cuts despite the huge debt-pile the nation continues to accumulate. Where his fellow Conservative MPs are always a little more reluctant to raise their voices is in identifying where precisely matching spending cuts can and should be made to fund the reductions in tax for which they are so loudly clamouring.

For sure an election will soon be upon us, but as this administration may soon definitively discover, once the mood turns there is little you can do to hold back, yet alone turn, the tide. If the die is already cast, there is much to be said for taking the workmanlike, steady and responsible path.  Some excitable Tory MPs may claim otherwise in the days ahead, but I suspect this budget statement has made no appreciable difference to the party’s prospects. Nor was it ever going to do so.

Written on 6 March 2024 by The Rt Hon Mark Field, former Member of Parliament (MP) for Cities of London and Westminster and Consultant at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.

How can we help you?

We offer initial free confidential advice without obligation.