By Kel Nwanuforo
It might be a stretch to say that the latter was delivered. In their latest report published alongside the Budget, the government’s independent economic forecaster, the Office for Budget Responsibility (OBR), says that economic growth next year will be lower than previously thought; inflation higher, in each of the next five years; government debt higher each year too; and real household incomes, lower each year.
This is not to blame Mr Healey, chancellor for only 101 days. The backdrop he confronts is challenging, to put it mildly. For one thing – difficult as it may seem to recall now – at the time the OBR put out their last set of forecasts, the war in Iran and all of its associated impacts had not even begun.
And this isn’t to say that a number of the individual measures contained in the Budget will not be welcomed by many.
Key assistance measures
- VAT suspension on household energy bills, previously due to expire in January, extended to July
- Standing charges to be removed from gas bills next year
- Homes in council tax bands A-D to be eligible for a £100 Household Energy Payment from January
- The freeze on fuel duty – in place since 2011 – extended until July
- The Starmer government’s plans to reduce the annual Cash ISA limit from £20,000 to £12,000 for the under-65s have been scrapped
- A new ‘Starter ISA’ is to be developed to reward first-time investors
- Changes to the Lifetime ISA to remove the current penalty if savers end up buying a home worth more than the £450,000 limit; the product will be replaced by a new First Time Buyer ISA in future, with details to come
- Confirmation that most people receiving the state pension will not have to pay income tax when the payment exceeds the Personal Allowance, with the introduction of a new Pension Tax Allowance
- Increased business rate relief for hospitality and leisure businesses
- The National Living Wage and National Minimum Wage will both rise next year by 3.9% – a good increase yet more manageable than in some recent years
Together, these measures are likely to provide help at the margin for many. It would be less credible, though, to claim that they represent a radical departure from the kind of packages we have often seen in past Budgets. Nor will they have a dramatically positive impact on the UK economy (the OBR’s growth forecasts are below 2% for each of the next five years).
Less likely to be welcomed are the key funding measures paying for the cost-of-living help.
Key revenue-raising measures
- Taxation on income from property and savings to rise by 2 percentage points per tax band again
- The allowance for Business Asset Disposal Relief will be reduced from £1m to £500,000, meaning higher Capital Gains Tax for some
- The Bank Corporation Tax Surcharge will double from 3% to 6% for 15 months from January. While people are unlikely to shed any tears for the big banks, they often do not consider that higher taxes for banks could well be fed through to higher loan rates for consumers and businesses and lower savings interest
What investors should keep in mind
First, it is always worth remembering that the UK does not represent the be-all and end-all for most investors – far from it.
Though of course individual portfolios will vary from person to person and company to company, it is common nowadays for professional wealth managers to take a global approach on behalf of their clients.
So, despite home news understandably dominating on Budget days, the actual feed-through into many investors’ holdings is likely to be modest. The UK makes up only around 3% of the global stock market by value, for example.
Second, and most importantly, the chancellor has kept to the ‘fiscal rules’ set out by his predecessor. These aim to limit borrowing to national investment (with day-to-day spending coming only from tax revenues) and to get debt falling in relation to the size of the economy over the coming three years.
While there is room for debate around the precise design and application of the fiscal rules – ‘tomorrow never comes’ for the rolling three-year debt target, for example – the fact they exist at all is crucial to retaining investor confidence at a time of high inflation and high government borrowing globally. As noted by the chancellor in his speech, the International Monetary Fund has recently stated that the UK’s commitment to deficit reduction looks much more credible than in many peer economies.
This is vital because our debt interest bill is rocketing. We now spend more paying bondholders interest than we do on schools and the Army – well over £100 billion a year – and government borrowing rates are already at the highest levels in decades. The chancellor needed to avoid adding fuel to the fire and the early market reaction to his Budget suggests he has succeeded, with government borrowing costs marginally down at the time of writing.
Investors should also bear in mind that many key touchstones regarding the new government’s policies remain yet to come – including the multi-year Spending Review, former Cabinet member Alan Milburn’s welfare spending review and the prime minister’s own ‘ten-year plan’.
Still, as we look back on this afternoon’s events, it seems fair to say that having bought the general public some ‘breathing space’, the chancellor might well have bought himself a little too.
Join us at 12.00pm on Tuesday 3 November as we take a look at the impact of the Budget on individuals, investors and the economy in a live webinar.
