Spring Budget 2024: Key takeways

In this budget statement the Chancellor had to walk a fiscal tightrope – spending enough to win over voters ahead of the imminent election but still emphasising to capital markets the commitment to fiscal probity. This meant there was an expectation that any tax cuts would focus on personal taxes.

Overall, the budget does raise spending relative to the prior forecast by around £13bn in 2024-5, fading to a c. £5bn increase in the final year of the forecast. However, overall spending is declining and the budget does adhere to the Government’s fiscal rules.

The budget contained lots of messages designed for the electorate: rewarding work (and being hawkish on migration), incentivising innovation and optimising public services spending. However, there were only really two tax announcements of significant size: the 2p cut to National Insurance contributions, costing c. £10bn a year, and the fuel duty freeze, costing c. £3bn in the first year and c. £1bn thereafter. Other notable measures were the Introduction of a new ‘British’ ISA adding £5,000 to savers’ annual limit and a reduction to Capital Gains Tax rate on second property sales.

On the revenue side, a range of measures were announced, though these do not fully fund the tax cuts announced. The eventual abolition of non-dom tax status is expected to raise c. £3bn in the final three years of the forecast. The continued crack-down on tax avoidance is hoped to raise c. £1bn in the final four years of the forecast, though this may be difficult to achieve. Extending the energy profits levy also adds a further £1bn in 2028-2029 and changes to tax on property tax, tobacco and vapes also bring in about half a billion pounds each in coming years.

The consequence of unfunded tax cuts is diminished headroom against the government’s fiscal rules, most importantly that government debt as a percentage of GDP should be falling in the final year of the forecast. The Office for Budget Responsibility estimates that public sector net debt as a percentage of GDP will only fall by -0.3% in the final year, shrinking headroom by £4bn to £8.9bn. Given that it is highly likely that fuel duty is frozen for the foreseeable future, the decline is likely closer to 0.1%, leaving only £4bn headroom. Moreover, these numbers assume cuts to expenditure in the next parliament.

The £13bn increase in spending in the first year of the forecast is meaningful at around 0.5% of GDP, and should be modestly supportive for GDP growth. However, the prospect of spending cuts in coming years are likely to weigh on activity.

The modest support for GDP growth means that this package could also support inflation, though frozen duties on fuel and booze will weigh on Consumer Price Index. However, data this year has been on the soft side, making a greater case for rate cuts. In addition, energy prices and the Ofgem price cap are likely to continue to weigh on inflation. In May we will get updated forecasts from the Monetary Policy Committee. We expect that the combination of softer activity and more rational assumptions for rate cuts may allow the Bank of England to land inflation at or below target in the forecast conditioned on market assumptions, making a clearer case for rate cuts.

 

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