Budget 2024 Thoughts

Context, as I have been at regular pains to argue in these pages, is everything when assessing the state of the UK economy. A failure to embrace reality on tax and spending is not unique to UK politicians. The world’s largest economy, the United States, finds itself on a considerably less sustainable path for its federal finances. Republicans and Democrats fall over themselves to run ever larger deficits. In a similar vein, anaemic economic growth is not just a UK disease. Most major energy-importing economies – including Germany and Japan – are also currently in shallow recessions as a fallout from the huge spike in energy prices during 2022. Engineering a soft economic landing without high unemployment is also not a challenge faced solely by the UK. Indeed, increasingly the challenge for European economies seems to be how to calibrate their economic policy as headline inflation falls below 2% in the Spring. Have all these economic challenges been made harder to navigate in the UK because of the political and economic fallout of Brexit? Absolutely. But shared challenges are the correct economic context with which to appraise the UK’s Spring Budget.

This was a Budget that, despite pleas to the Chancellor from his political brethren for an electioneering “retail offer” on tax, largely took aim at the Achilles Heel of the UK’s economic performance: inactivity, underinvestment, and a lack of public sector innovation. 

Let’s begin with inactivity. The first thing to note is that by focusing on work incentives – the Budget cut employee National Insurance rather than the more politically resonant Income Tax – the Chancellor had the right instincts. The UK has 9.3 million people of working age without a job and not actively seeking work. This is the highest number in eleven years. Of these 9.3 million, only 1.9 million state that they actually want a job. This strongly suggests that incentives to earn a wage have been eroded by high inflation in the wider economy, recent frozen tax thresholds, and by asset price inflation. The Chancellor was at pains to argue that his recent cuts to National Insurance would bring 200,000 people back into work – but in the context of current inactivity this will need ongoing efforts across the tax and benefit system as well as, crucially, in occupational health interventions. For all the hard hat and hi-vis vest opportunities that big investment projects create, it is work readiness amongst the population that can most swiftly turn round the UK’s economic fortunes.

Secondly, the government went further than it did last Autumn in encouraging business investment. Whilst extending full expensing to assets for leasing does not exactly give Tory MPs a soundbite on the campaign trail, this is recognition that asset-light businesses are at a competitive advantage and the tax system should encourage a level playing field. Wider business investment initiatives included a British ISA – an additional £5,000 a year savings allowance for investment in UK companies – and a requirement for pension funds to disclose their UK assets.  These policies recognise that for four decades the UK economy has underinvested in its future. National accounts for the G7 group of industrialised economies reveal that since the early 1980s total investment spending has averaged 21% of GDP. In the UK total investment spending has been just 18%. Three percent doesn’t sound much of a gap but compounded over four decades this is an enormous gap in the UK capital stock. This shortfall was further amplified during the post-Brexit uncertainty. While the UK is now beginning to bridge the gap thanks to recent initiatives including a Corporation Tax Super deduction, the UK continues to underinvest compared with its competitive peers. This government’s track record on investment is one data point that the Chancellor’s otherwise impressive speechwriters struggled to mask. 

The hope in the Treasury is that efforts to reverse these trends on inactivity and investment triggers an upturn in economic growth. But this will also require the third focus of the Budget to bear fruit. This was a plan to bring greater innovation into the delivery of public services. It is a depressing statistic that the UK public sector is less productive today than it was in 1997. This, despite all the technological progress that has emerged in the wider economy. Whoever wins the next election will need a more innovative state to have any chance of making its books balance. The public sector productivity plan unveiled at the Budget is a long overdue initiative. It will need to work if funding of non-protected public services such as councils, the police, environment services and housing budgets isn’t to experience a further bout of austerity. If the next Budget isn’t to be dominated by renewed tax increases, then these supply side initiatives need to work, and quickly.