Subrahmaniam Krishnan-Harihara, Deputy Director of Research at Greater Manchester Chamber of Commerce, reviews the Budget.
In an election year and with a general election only months away, there is no doubt that the government in power would offer some giveaways. The current government's pre-election giveaways took the form of tax cuts announced in the Chancellor’s Budget speech today. Media reports from the last few days had made it clear that a further cut in NI contributions was in the offing. The Chancellor confirmed this along with some other measures to 'reward work'.
The headline measure in the 'rewarding work' category is a two-percentage points reduction in class 1 and a one percentage point reduction in class 4 National Insurance contributions. While a reduction in NI is welcome, income tax thresholds remain frozen, which means taxable income and the actual tax bill are likely to increase. Micro businesses and the self-employed will gain from the £5,000 increase in the VAT threshold to £90,000. At the same time, the Child Benefit system is being more liberal. Together, these measures could increase workforce participation but also the taxes they pay.
Keeping with the theme of cutting taxes, Jeremy Hunt also announced a four-percentage point reduction in the higher rate of property capital gains tax, freezing the 5p cut to fuel duty and alcohol duty. By 2025, these supposedly 'temporary' freezes will have run for three years raising questions about whether they are temporary, only because they allow Chancellors to renew the good news for yet another year. Moreover, these measures are unlikely to have a substantial impact on stimulating consumption or investment.
Having announced full expensing for eligible capital investment at the Autumn Statement 2023, there isn't much ammunition left to further boost investment, but the Chancellor announced an additional measure to allow full expensing on leased assets providing fiscal conditions allow this. Alongside these, other tax relief and support measures targeted at the creative sector were announced. Another interesting development is the creation of the new British ISA, which gives investors an additional £5,000 ISA allowance to invest in UK assets. In principle, this measure is aimed at encouraging retail investors to put money into UK businesses. The new British Savings Bonds from National Savings and Investments, which offers a guaranteed interest rate for three years is another measure to provide investment finance. However, amidst a cost of living crisis and lower levels of savings, it is not clear how much additional funds these products will raise. Moreover, the British ISA and British Savings Bonds are likely to be utilised only by those with larger incomes.
The Chancellor mentioned high skill, high wage jobs and productivity more than once in his speech. And yet, with the exception of a £7.4 million pilot scheme for SMEs to develop AI skills, there was no major skills development announcement.
Today's Budget could well be the last fiscal statement from the present government and Jeremy Hunt delivered one his longer speeches lasting nearly an hour and 10 minutes. There were some new measures but there other previously announced measures such as disclosure requirements for pension funds, additional investment in R&D and measures to increase public sector productivity that were also included. Some taxes have been cut while other tax relief measures have been abolished. Government departments and local government will need to find savings and here is where our big concern is. It is vital to consider the consequent impact on public services. Apart from those areas which have protected budgets, public spending is highly likely to decrease in the rest of this decade. Government departments and local government will need to find savings. Perversely, that could also raise another form of taxation – council taxes. The Chancellor has himself acknowledged that the aim to boost UK productivity and unlock business investment need good public services. Consequently, the question for Conservative MPs, businesses and voters is likely to be this: do these tax cuts and other measures secure UK growth for the short to medium term? Or are they too little, too late and even cause more of a squeeze in the coming months and years? The answer to that question will have a bearing on more than electoral prospects. They will determine the economic and social wellbeing of the UK for the rest of this decade and next.