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Spring Budget Preview

05.03.24 | Written by Dan Humphreys

Jeremy Hunt will deliver his second spring Budget tomorrow and it will be both something of a throwback and an outlier all at once. 

It will be a throwback in so much as it will be the first time since March 2010, when Alastair Darling delivered his last Budget, that a chancellor delivers an election year Budget knowing that it is election year and unencumbered by the constraints of coalition. In March 2015 George Osborne knew he was presenting a pre-election Budget but couldn’t exploit the political potential because Nick Clegg and the Liberal Democrats obviously wouldn’t sign up to a Budget that was designed to win Conservative votes in the upcoming election. In 2017 Philip Hammond was as unaware as the rest of us that his Prime Minister was soon to take a walking holiday in Snowdonia during which she would make the error of deciding to call a snap election. The political chaos of 2019 meant there was no Budget at all that year. 

In this regard Hunt’s Budget this week will be a small mark of British politics getting ‘back to normal’. Or at least what was normal for most of the twentieth and early twenty-first centuries. It’s an outlier as well though. Typically, spring Budgets tend to be held in the second half of March, or even April. This will be the earliest Spring Budget of the century so far except for 2021’s event (that was actually a Covid delayed Budget that should have been delivered in Autumn 2020). 

The early date has set off fevered speculation that the Chancellor and Prime Minister are planning either for a snap general election in May or are adapting timelines to allow for a second big fiscal event in early September. While either of those two things may yet happen (my money is on the latter), either could happen if the Budget had been held on the 20th March. The real explanation is far less exciting. The reason the Budget is being held a fortnight earlier than we would usually expect is that current legislation mandates a 5p rise in fuel duty to kick in on 23rd March. Contrary to the impression often given, politicians are not stupid. Or at least not stupid enough to hike fuel duty in an election year. In order to cancel the rise in fuel duty the Chancellor needs to announce it this week and get the legislation through before 22nd March. 

And therefore, we don’t need to look into our crystal balls to identify what the first measure in the Chancellor’s announcements will be. Fuel duty, which was cut by Rishi Sunak in 2022, will be frozen. The only thing to look out for here will be whether Hunt announces that it will be permanently frozen at the current rate of 52.95 pence per litre or whether the Chancellor will simply postpone the planned rise for another year as he did in 2023’s Budget. 

This seemingly small decision will matter. If he merely postpones the rise for another twelve months this will give him more ‘fiscal headroom’ for his medium-term projections which is precisely why he didn’t announce a permanent freeze last year. The flip side to this is that if he doesn’t announce a permanent freeze the Conservatives will go into a general election vulnerable to the accurate charge that they are planning to hike petrol and diesel prices if they get re-elected. On this basis, expect the Chancellor to announce a permanent freeze and lower his already limited scope for manoeuvre. 

The fuel duty freeze will cost the exchequer around £1bn per year. Recent downgrades in economic growth figures and the higher than hoped for cost of borrowing have reduced the number and scale of the options available to the chancellor. Within this context we now wait to find out which Jeremy Hunt will arrive in the House of Commons on Wednesday. Will it be the long-term planner with an eye on his legacy, the political operator, focused on creating dividing lines for the general election or a mixture of the two? 

Since taking over as Chancellor from Kwasi Kwarteng in 2022 Hunt has been admirably principled in focusing on measures that tend to ensure economic and fiscal stability. In his first financial statement he announced the reversal of a host of tax cuts and went further in raising others while a chastened and powerless Liz Truss sat next to him in silence. We know from his own time as Chancellor that when it comes to personal taxes Rishi Sunak favours cuts to income tax over cuts to national insurance. It was Jeremy Hunt who decided last Autumn to reduce the rate of employees’ national insurance by two percentage points. While the decision to allow full expensing on plant and machinery is very much a Sunak policy it cost the Chancellor space to make other, more voter friendly tax cuts in the short to medium term. But he delivered the policy to encourage a growth in investment. 

As the election grows every closer the need to deliver some crowd-pleasing measures will grow and grow. While Hunt’s fiscal headroom is tight, there are some areas in which he may choose to get a bit more political. 

A cut to income tax would benefit more people in England, Wales and Northern Ireland as pensioners would feel the benefit too. Another cut to national insurance would mean any feel-good factor would be restricted to people of working age. However, unlike income tax rates, national insurance rates aren’t devolved in Scotland so another reduction in employees’ national insurance would be felt in all parts of the United Kingdom.  

The other option available to the Chancellor would be to reduce taxes by adjusting thresholds that are projected to remain frozen until 2028. This freeze is pulling more and more low paid workers into paying income tax and more and more middle-income earners into higher rate tax bands that were originally intended for high earners. For families the phased withdrawal of child benefit for those earning above £50,000 adds to these high marginal tax rates. Due to these cliff edges it is possible for someone earning between £50,000 and £60,000 with enough children to have a marginal tax rate of 100%. 

Earlier in the year there was speculation that the Chancellor might act on these thresholds, but this has since died down. Expectations now are that the Chancellor will look to a cut in the basic rate of either income tax or national insurance. It’s likely that the most telling factor here will be the cost of the policies. A further 1% cut to national insurance will cost £4.5bn per year. The equivalent cut to income tax, while arguably being less fair to workers, will cost significantly more. All bets now are on a cut to national insurance. 

The other tax cut that always appeals to some Conservative MPs is on inheritance tax. This tax may not be popular (what tax is?) but in its current form it is irrelevant to the vast majority of the population. Most estates aren’t taxed. This will not be a priority for the Chancellor. 

It is unlikely that he will do any more than he did last Autumn on business taxes. The hospitality and retail sectors are lobbying for a reversal of the so called ‘tourist tax’ which doesn’t allow overseas tourists to reclaim VAT as they once could. The argument is that this costs more than it brings in by putting off tourists from visiting and shopping. This is unproven and the continuing weakness of the pound is offsetting that disincentive to an extent. There is little sign that the Treasury will give up this source of income. The move to confirm full expensing as a permanent measure is likely to be the biggest move for businesses for now. 

The Budget also allows the Chancellor to consider increasing or cutting funding for public services. Despite compelling evidence that the majority of voters now see increasing funding for public services as being more important that cutting taxes the Chancellor is likely to ignore calls for more public spending and investment. If anything, he may lower projections for increases to departmental spending in future years from 1% to 0.75% per year from 2025 onwards. With inflation still high and the population expanding, rises of 1% are already effective real terms cuts. Lowering this to 0.75% would signal even larger cuts but would give Hunt further room for tax cuts. 

The Treasury team will be looking at ways to increase income from sources other than personal taxes. One option being seriously discussed is ‘stealing Labour clothes’ and abolishing or at least reforming the rules on non-dom status for tax purposes. This would allow the Chancellor to raise money to fund his tax cuts and would reduce the options for an incoming Labour government to implement this relatively non-contentious move to fund their own plans. 

Changing the rules for non-domiciled status would be a point of contention for the right wing of the Conservative parliamentary party though. If he did abolish or reform the rules to time limit the status, Hunt would be doing so in the face of opposition from many on his own benches who believe that it would be counter-productive and drive away high earning people from living in and investing in Britain. 

Two days out from the Budget, the Chancellor has far less wriggle room than he had hoped for. Our bets are on a permanent freeze to fuel duties, a cut to national insurance and a remote possibility of some small changes to thresholds possible through the Universal Credit system. Don’t be surprised if the non-dom rules are also changed to steal a march on Sir Keir Starmer and Rachel Reeves. 

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