UK Budget – no game changer for UK economy

The main policy changes in today’s Budget were largely expected. While there is some support to stimulate growth, the tax burden will continue to rise over coming years.

The Office for Budget Responsibility (OBR) stills expects a subdued economic expansion in 2024, while its forecast for growth next year looks on the optimistic side. The government met its main fiscal mandate, but the debt burden is still expected to rise materially from current levels. The risk is that it could be higher than the OBR currently projects.

There were few major surprises in the Budget, with most of the measures previously heavily flagged in the media. The main policy change was the cut in the rate of national insurance by 2p. Combined with the previous reductions in the Autumn Statement in November, the Treasury estimates that the average worker earning £35,400 will be £900 better off than in 2023, while the average self-employed worker on £28,000 will be £650 better off.

Lower interest rates and inflation had reduced projected government borrowing over the next few years, and the various revenue raising measures announced (end of the ‘non-dom’ tax regime, a duty on vapes and rise in tobacco duty, an extension of the oil and gas windfall tax etc) mean that borrowing was only slightly higher than previously expected at the end of the forecast horizon in 2028-29.

In terms of the economy, the cuts in personal taxes should provide some near-term support to growth, by reducing the magnitude of the rise in the tax burden over the coming fiscal year. They should also boost the economy’s supply-side, by raising the incentives to work. Nevertheless, the tax burden will continue to rise and remains on course to reach its highest level since 1948 in 2028-29 (see chart).

Amid tight fiscal policy, restrictive monetary policy, and a rather challenging global backdrop, it was not surprising that the OBR continues to forecast subdued growth of just 0.8% in 2024. It is, however, forecasting an acceleration in growth to 1.9% in 2025. This looks on the optimistic side and is well above the Bank of England’s latest forecast of 0.75%.

The Chancellor continued to meet his main fiscal mandate, that underlying public sector net debt (net debt excluding the Bank of England) is falling in the fifth year of the forecast. However, it is not a particularly challenging fiscal rule, and has received criticism from various quarters. Indeed, the debt burden is still expected to rise from 88.8% of GDP in the current fiscal year to a peak of 93.2%, before edging back to 92.9% in 2028/29. Moreover, the risks to this forecast are on the upside given the significant pressure on public services, and amid increased pressures to increase spending on defence and the green transition.