Global Investment Strategy | Global Financial Services

As we approach the next budget, due to be announced on 6 March 2024, there is the normal degree of speculation and counter-speculation. With an election likely to be called later this year, the government will be looking to cast the best light on the UK economy and return an element of the feel-good factor to taxpayers. How might this emerge?

Tax cuts could be challenging

In the Autumn Budget, 22 November 2023, Jeremy Hunt suggested he was looking at several tax changes, likely to be implemented in March. Without directly saying so, the indication was that there would probably be a reduction in UK income tax rates. Unfortunately, with the UK entering a technical recession, it is starting to look like any meaningful tax cut will be delayed. Consequently, Jeremy Hunt is desperately seeking to dampen down expectations amongst both the Conservative party and the voting population.

Initial suggestions of a 2p cut in the income tax rate, or national insurance, appear challenging. The Autumn Budget stated a £13 billion reserve, which could be used in the March budget. It would appear that hopes of additional funding have all but disappeared, and a 2p cut in national insurance would cost £9 billion and around £13 billion for a similar income tax cut. There is a growing consensus that any tax rate cut could be limited to 1p, although there could be other surprises in the budget.

Impression is everything

Over the last few days, rumours have emerged that we could see a reduction in public sector services to pay for a meaningful tax cut. On the one hand, yes, this would reduce the tax-take for the average person and family, but on the other hand, it could be seen as "robbing Peter to pay Paul" to the detriment of public services. This will again prompt suggestions that the Conservative government is looking to reduce the size of the public sector and privatise an array of public services. Not a vote winner!

Interest rates

The benchmark ten-year gilt yield stood at around 3.6% at the start of the year but has since increased to 4%. This means that the cost of funding government borrowing has increased, although it is less than the 4.5% rate used in last year's pre-budget OBR projections. We also know that interest rates will fall in due course, but initial expectations of an earlier move have all but disappeared. Instead, experts believe we will see a reduction in UK interest rates in the spring and further movement later in the year.

ISA investments

The Chancellor has been openly discussing the idea of a Brit ISA to encourage investment in UK-listed companies. One proposal is the introduction of an additional £5000 tax-free allowance on top of the current £20,000. However, the additional funding would be directed towards UK-listed companies. There are also rumours regarding restricting a portion of the current ISA allowance for investment in UK-listed companies.

This idea seems perfectly sensible, potentially encouraging companies to list in the UK. However, early indications are that the financial services industry is not supportive and sceptical that such a move would be nothing but a PR stunt.

UK economy

Recently, we have heard confirmation that the UK economy fell into a technical recession towards the end of 2023. While inflation continues to fall, currently standing at 4%, many members of the Bank of England MPC are reluctant to reduce rates until inflation is nearer the 2% target. Indeed, some committee members favoured an increase in interest rates to offset a potential surge in inflation.

Even though the headlines are all about the technical recession, the Bank of England has already confirmed this is likely to be a shallow, short-lived recession. However, the headlines are not good news ahead of the forthcoming election.

Summary

Jeremy Hunt has taken a realistic approach to the UK balance sheet regarding tax income, expenditure and the cost of borrowing. As a Conservative, the natural pull is towards income tax rate reductions, which may be challenging in the March budget. If he takes money from the public service budget to fund tax reductions, this will not receive universal support across the electorate.

Jeremy Hunt does have a challenge on his hands, balancing the books while trying to give a positive spin on the UK economy and reduce taxes simultaneously.