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Eighteen months on from the mini-budget chaos, City investors are hoping for a calmer day today as Jeremy Hunt prepares to present this year’s major fiscal event.
Fortunately, a repeat of the market chaos of September 2022 is highly unlikely; while there may be tax cuts announced today, the government is sticking to its (criticised) fiscal goal of showing debt falling in five years time.
Crucially too, the government has also worked with the independent Office for Budget Responsibility (a critical step skipped by Kwasi Kwarteng), which will give its verdict once Hunt finishes speaking in parliament today. That should help prevent a crash in the bond market, or in sterling, today.
As we covered yesterday, a 2p cut in national insurance rates are expected to be the centrepiece of the budget today, as Hunt tries to increase the supply of labour in the economy, and the supply of voters to the Conservatives (Tory MPs, though, would prefer a more eye-catching, but pricier, cut to income tax).
Lowering NI by another 2p, on top of the 2p cut last autumn, will save the average worker another £450 – meaning Hunt can say he’s cut tax bills by £900 on average.
Sarah Coles, head of personal finance at Hargreaves Lansdown, wasn’t too impressed by yesterday’s reports of NI cuts, saying: "It wouldn’t be so much a rabbit pulled out of a hat as a slightly tatty-looking ferret dragged from a box, labelled ‘rabbit’. An income tax cut has been discussed for well over a year.
A national insurance cut would be far better than nothing, but it would be a scaled-down, less attractive option. Jeremy Hunt would just have to hope it didn’t bite."
The decision to freeze income tax thresholds is biting taxpayers; this fiscal drag means more taxpayers are being pulled into paying tax, or into paying tax at a higher rate.
Calculations by the Resolution Foundation show that only those paid between £27,000 and £59,000 a year will be better off as a result of both the autumn statement and Wednesday’s budget, once the freeze in thresholds are accounted for. Those paid £16,000 will lose almost £500 a year, as will those receiving more than £60,000.
Hunt needs to keep the City onside, as a negative reaction from markets will increase the cost of borrowing for the government.
Hal Cook, senior investment analyst at Hargreaves Lansdown, warns that the market for UK government debt – or gilts – has been weakening in recent weeks, pushing up the cost of borrowing: “Gilt markets have been under pressure for some time, due to the combination of high inflation, increasing interest rates, higher levels of government bond issuance post-Covid and the Bank of England selling its gilt holdings back to the market.
"This has made UK gilts less attractive investments compared to cash and the increased supply has also worked against gilt prices."
This increase in borrowing costs has eaten into the chancellor’s fiscal headroom – the amount he can spend without breaking his fiscal rules; it’s thought to be about £13bn.
The chancellor is also expected to extend the fuel duty freeze, at a cost of £5bn, which will support the wealthiest.
Economists have warned Hunt against making pre-election cuts to tax and spending in the budget, fearing that pre-election giveaways could backfire.
Tax rises are also expected today; options include introducing a levy on vaping products, increasing taxes on short-term holiday lets, extending the energy windfall tax and increasing taxes on business-class flights.
Hunt has also reportedly considered scrapping Britain’s non-domiciled tax rules, which currently allow foreign domiciled nationals resident in Britain to earn money from capital abroad without paying UK tax on it for up to 15 years.
As he presides of an economy currently in a recession, Hunt is expected to present today’s measures as an effort to economic growth. He’ll say: “Conservatives know lower tax means higher growth. And higher growth means more opportunity and more prosperity … Instead of going back to square one, our plans mean more investment, more jobs, more productive public services and lower taxes.”
But his fiscal calculations may also be based on tough limits to public spending after the election, which would put unrealistic pressure on services.
Sanjay Raja, the Deutsche Bank chief UK economist, warns that the public finances face “big challenges”: "The macro backdrop will likely prove challenging for the chancellor. A weaker economy will hamper his ability to spend meaningfully in the spring budget – despite lower market rate expectations. Falling inflation too will limit the impact of fiscal drag on the chancellor’s coffers. Challenges around spending cuts pencilled in over the medium-term could also prove unsustainable."
The agenda
• 9.30am GMT: UK construction PMI for February
• 10am GMT: Eurozone retail sales for February
• 12.30pm GMT: Jeremy Hunt to deliver the UK budget statement
• 1.15pm GMT: ADP survey of US private sector employment
• 1.30pm GMT: Office for Budget Responsibility to publish its Economic and fiscal outlook
We’ll be tracking all the main events throughout the day ... |
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