Hi Friend, We were promised a budget for
growth. In reality it looked like a classic Labour Budget, taxes up,
spending up, borrowing up. Debt set to average almost 100% of GDP, tax
revenues set to hit 38% of GDP. Government spending set to average 45%
of GDP.
The Prime Minister had promised to reach for the Growth
Lever. Instead, the Chancellor grabbed the Tax Lever increasing the tax
burden by a massive £40 billion.
As for growth, the Office For
Budget Responsibility suggested output would be little changed at the
end of the forecast period. A sugar rush of government spending would
generate a growth surge of almost 4% over the first two years of the
plan. Thereafter economic growth would moderate to an average 1.5% over
the period 2027 to 2029.
Are the growth forecasts so bad? Growth
in the UK was just 0.1% in 2023 and an expected out turn of 1.1% in
2024. Many commentators would settle for base line, non inflationary
growth of 1.5% over the medium term.
Should we place any reliance
on the OBR forecasts more than two years out? Time will tell if the
forecasts will be realised to any degree of accuracy. Too soon to hoist
the Chancellor by that particular petard.
Government spending on
investment is set to surge by 6% in 2026 and by £100 billion over the
next five years. The investment spending will boost growth. The problem
it may take a stretch into a second parliamentary term to realise the
real gains in National Income levels.
Inflation CPI is set to increase to 2.6% next year and 2.3%, returning to target 2% by the end of the forecast period in 2029.
Unemployment
is set to average 4.1% over the five years. Moderate growth, low
inflation and stable employment levels, what’s not to like?
Spending Plans ...
Chancellor
of the Exchequer Rachel Reeves delivered a Budget to “Fix the
Foundations of Our Economy.” It could have been called, “Mopping Up The
Mess” of fourteen years of Tory mismanagement.
The Government
inherited a £22 billion Black Hole. In reality it was more like a £9.2
billion pothole. The incoming government had to tackle the problem of
public sector pay, setting the issues of conflict with Junior Doctors
and other NHS staff. Public Sector Net Borrowing was set to hit £120
billion this year, well before the Budget numbers revised the spending
plans.
The good news is the budget spending plans recognised the
commitments to compensate the victims of two major public scandals. Some
£11.8 billion will go to those impacted by the infected blood scandal
and £1.8 billion will be paid to victims of the Post Office Horizon
debacle.
On day to day spending, the Red Book states “The
Chancellor plans to protect public services as departments’ day-to-day
spending is set to grow by an average of 3.3% in real terms between
2023-24 and 2025-26, including an increase of more than £22 billion for
the NHS to help bring down waiting lists and £4 billion for the
education sector to stop schools falling down.
The Budget will
provide a boost to public investment by over £100 billion over the next
five years across roads, rail, schools and hospitals. Public Sector
Investment will average 2.5% of GDP over the period compared to a
planned fall to 1.7% under the Tories.
Tax Hikes ...
The
Budget confirmed increased National Insurance contributions for
employers, higher stamp duty on second homes, and the removal of the VAT
exemption on private school fees. Passenger levies were also hiked on
private jets.
The budget’s biggest measure, the £25 billion rise
in national insurance came under pressure from the IFS. “It will not get
them anything like the £25 billion stated on the scorecard,” Paul
Johnson said. “The OBR noted it will result in lower wages, lower hours
and some job losses. This will reduce the amount raised from employer
national insurance, employee national insurance and income tax revenues.
Tom
Peck writing in the Times claims the day after a budget, no one really
cares anymore what the chancellor has to say. The only view that really
matters is that of Paul Johnson, the head of the Institute for Fiscal
Studies, who has for some years hosted a post-budget briefing. He sits
in his corner office and systematically dismantles everything that was
said the day before.
If you were being gentle, you’d call it the
budget’s elephant graveyard. Really it’s a budget abattoir. Budgets
don’t fall apart, he rips them apart.
“I’m afraid this looks like
the same game playing we got with the last lot,” Johnson said. He
gently pointed out that all the government departments who’ve been given
4 or 5 per cent budget increases this year, aren’t going to be placated
by the projected 1 per cent increases thereafter.
This, he said,
was: “Pencilling in implausibly low spending commitments in the future,
in order to make the arithmetic balance, repeating the same silly
manoeuvres.”
He pointed out that future projections also
depended, for example, on ending the freeze on fuel duty, which has been
in place since 2011, because no chancellor would dare.
Not in a Happy Place … The Bond Market Vigilantes Look On …
The
Chancellor’s plans prompted an adverse market response, with ten year
government bond yields rising to 4.5% yesterday before easing back to
4.4% at close of week. Hardly a Liz Truss moment but enough to set off
tremors in the Treasury and raise fears of a Gilt Strike.
Ratings
agency Moody's said British finance minister Rachel Reeves' first
budget will create new challenges to efforts to strengthen Britain's
public finances, with the UK still facing muted growth, the Financial
Times reported on Friday.
While the NHS stands to benefit, other
sectors face challenges. GPs, care homes, dentists, and hospices are
pushing back against the National Insurance hike, while farmers worry
about inheritance tax forcing them to divide family land. Rural
communities are also questioning a 50 per cent increase in the bus fare
cap.
Hospitality and retail business are reeling from the 6% hike
in minimum wage compounded by the increase in National Insurance.
Business closures and job losses may follow.
Chancellor of the
Exchequer Rachel Reeves delivered a Budget to “Fix the Foundations of
Our Economy.” Let’s hope so … The Bond Market Vigilantes Are Watching
... |
