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2024 Spring Budget Review

The United Kingdom Chancellor of the Exchequer presented his Spring Budget to Parliament on Wednesday 6 March 2024. Here are some highlights relevant to BHETA members and consumers:

Economic overview

  • Inflation fell from 11% in October 2022 to 4% in the 12 months to January 2024.
  • The Office for Budget Responsibility (OBR) forecast shows it falling below the 2% target in May 2024.
  • The OBR forecasts GDP to grow by 0.8 percent in 2024 and 1.9 percent in 2025.

Summary of key changes

  • 2p cut to employee National Insurance, from ten percent to eight percent.
  • Self-employed National Insurance will be cut from eight percent to six percent.
  • Extend the repayment period for budgeting advance loans from 12 months to 24 months.
  • Planned legislation for full expensing to apply to leased assets
  • From April 1, increasing the VAT registration threshold from £85,000 to £90,000.
  • £200m of funding to extend the Recovery Loan Scheme as it transitions to the Growth Guarantee Scheme.
  • Introduce the British ISA with an additional £5000 tax free allowance for investments in UK equity.
  • Reduce the higher 28 percent rate of Capital Gains Tax on property to 24 percent.
  • Reform the Child Benefit system so that the High-Income Child Benefit Charge will be based on household income rather than individual earnings and raise the threshold from £50,000 to £60,000.
  • The non-domiciled tax status will be scrapped and replaced with a residency-based system from April 2025, raising £2.7bn in tax revenue a year by 2028/29.
  • Day-to-day spending growth will be one percent in real terms.
  • Introduce excise duty on vaping products from October 2026 and announced a consultation on its design.
  • Increase tobacco duty from October 2026.
  • Increase rates of air passenger duty on non-economy flights.
  • Abolish the furnished holiday lettings regime.
  • Abolish stamp duty relief on the purchase of multiple dwellings in one transaction.
  • Extend the energy profit levy, the “Windfall Tax”, to 2029 to raise an additional £1.5bn.
  • Proceed with the retail sale of the Government’s NatWest shares.

Go to the Government website

 

Commentary from the Office of Budget Responsibility – 6th March

UK economy overview

The UK economy has emerged from the twin global shocks of the pandemic and Russian invasion of Ukraine into a period of declining inflation but stagnating output. Inflation has receded more quickly than we expected in November and markets now expect a sharper decline in interest rates. This strengthens near-term growth prospects and should enable a faster recovery in living standards from last financial year’s record decline.

Economic outlook

But the medium-term economic outlook remains challenging. One of the biggest changes to our economy forecast is an increase in the size and growth of the UK population. But higher and rising levels of inactivity offset its impact on the overall size of the workforce, leaving our forecast for the level of GDP in five years virtually unchanged from the autumn, and the level of GDP per person slightly lower.

The overall outlook for the public finances is also similar to November. Lower inflation and interest rates reduce the Government’s projected debt servicing and welfare costs, but they also reduce revenues. These pre-measures forecast changes result in a £20 billion fiscal improvement over the next two years but leave borrowing largely unchanged in five years’ time.

Spring Budget

The Budget announces a package of net tax cuts, including a further 2p cut to the main rates of employee and self-employed national insurance contributions, the cost of which is partially recouped by tax rises in later years.

Borrowing is still projected to fall in each of the next five years thanks to tax as a share of GDP rising to near to a post-war high, debt interest costs falling, and per person spending on public services being held flat in real terms. This is just enough to meet the Government’s fiscal rules on our central forecast with underlying debt falling as a share of GDP in 2028-29 by a historically modest margin of £8.9 billion.

This margin is a small fraction of the risks around that central forecast.

  • Inflation could rebound and remain higher for longer if the conflict in the Middle East were to widen or if domestic wage pressures do not subside as quickly as we assume.
  • There is also uncertainty around several key drivers of medium-term economic growth including net migration, labour market participation, and productivity growth.

The fiscal forecast is highly sensitive to movements in interest rates which have been unusually volatile recently. Since November, market expectations for medium-term Bank Rate have been both 1 percentage point higher but also ½ a percentage point lower than assumed in this forecast. The fiscal forecast is also conditioned on the tax take rising to near record highs, including through planned rises in fuel duty that have not, in practice, been implemented since 2011.

It also assumes the Government will stick to assumptions which imply no real growth in public spending per person over the next five years, despite committing to increase spending on some major public services in line with or faster than GDP.

Inflation outlook

CPI inflation was 4.2 per cent in the final quarter of last year, 0.6 percentage points lower than we forecast in November. We now expect it to fall further to an average of 2.2 per cent this year and 1.5 per cent in 2025 before gradually returning to target at the end of the forecast period. Our lower central forecast for inflation is partly driven by larger anticipated falls in global energy prices.

We also expect domestically generated inflation to be weaker, as falling energy prices pass through into lower economy-wide costs and the labour market continues to loosen. Our central forecast assumes current disruptions in the Red Sea make only a small (0.2 percentage points) upward contribution to inflation. But we also consider the risks of a widening conflict in the Middle East, through a scenario in which a sharp rise in energy prices causes inflation to spike back up to an annual peak of almost 6 per cent.

Interest Rates outlook

Alongside easing inflationary pressures, market participants now expect a sharper fall in interest rates than in the autumn. Bank Rate is expected to fall more steeply this year from its current peak of 5.25 per cent to 4.2 per cent in the final quarter of 2024. In the medium term, Bank Rate falls further to 3.3 per cent, almost ¾ of a percentage point lower than in our November forecast.

With gilt yields also around ½ a percentage point lower across maturities, the cost of debt interest for the Government is significantly lower than expected in November. But expectations remain volatile, as shown by expectations for Bank Rate in 2028 oscillating between 2.7 and 4.2 per cent since our November forecast.

Read more here


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