Rachel Reeves, the first woman Chancellor of the Exchequer, presented her budget today with great self-confidence and with a stark critique of the previous administration. Her plan is for tax rises of £40bn.
Repeatedly, she referred to 14 years of Conservative mismanagement of the economy, reminding us of Brexit and the Truss debacle. And to her claim of a £22 billion black hole in their last administration’s figures.
Political tensions
The budget statement produced an angry response from Rishi Sunak, in his last front bench appearance. It was clear from the March forecasts from the Office of Budget Responsibility (OBR) that without updated departmental spending plans (the previous figures were put together in 2021) there would be drift in the numbers. The OBR highlighted in their March report, that this could be in the region of £30 billion for both 2015 and 2021, the end of the last two spending rounds.
Politicians of all flavours have to stay popular to remain in power and Reeves pinned her hopes on a 1p cut in duty on a pint, numerous local capital and transport projects for deprived areas, the promise of 1.5 million new homes, a cash injection of £22 billion into the NHS and a promise of growth in the UK economy.
Economic challenges
Her difficulty is that the OBR is now forecasting lower growth in the UK as a result of her measures than they offered to Rishi Sunak in the spring. Reeves would like us to believe this is due to the OBR being given the wrong numbers by the Government.
The OBR have also forecast higher inflation in the next five or six years than they predicted in the spring. The investment markets have taken note and have pushed up gilt yields. The potential for mortgage rates to remain higher for longer may be an unpopular consequence of Reeves’s expansionary plans.
Key to all of this is a relaxation of her definition of public borrowing. While promising that recurrent spending will be met annually by recurrent receipts, she is going to offset capital debt by deducting the capital value of the assets created.
The concern is that the very substantial amount she is proposing to borrow to invest in growing the economy – something like £100bn - needs to be well spent for it not to feed back into higher inflation - and higher interest rates.
Immediate work for advisers
Financial planners will pick up immediately with their clients on several changes in taxation.
There was no change to the pension tax reliefs as some had feared, no further restriction of PCLS, no return of the LTA, no flat tax relief on pension contributions or restrictions on ISAs.
However, CGT has been put up from 10% to 18% for basic rate taxpayers and from 20% to 24% for high-rate taxpayers. Business asset transfers remain tax free up to £1,000,000 on death but will be subject to a 20% effective tax rate thereafter - whether they are farms or unquoted shares, either in family businesses or shares on the AIM market (which bounced today, expecting worse news).
Probably the change that will give advisers most scope to readdress their clients’ affairs is the announcement that pensions will fall within the IHT regime from April 2027. As always, the devil will be in the detail of the Finance Bill.
Growth - at what price?
Overall, this was a budget designed to meet the expectations of Labour voters at the last election, wanting more money put into public services without any increase in their taxes.
For it all to work, real growth will be needed in the economy. Much will depend on the implementation of a whole string of plans scheduled for publication in the Spring on the Civil Service, NHS, GB Energy and for the national industrial strategy.
The prospects for interest rates staying higher, as the Bank of England makes its own independent judgement on the changes announced in borrowing policy, may serve act to hold back the much hoped for, much needed growth in our economy. And that may make next year’s budget another ‘must watch’ event.
Want to hear more?
Yesterday, our Head of Strategic Partnerships, Patrick Ingram, joined Tom Browne from Money Marketing, Ian Cook from Quilter Cheviot and Chris Jones from Dynamic Planner to discuss The Budget in The Money Marketing Podcast.
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