Expect A Ballot Box Budget
Stephenson-Mohl Group’s Pre Budget Preview.
Expect calculated electoral politics at the heart of every policy announced on Wednesday as the Chancellor attempts to engineer a budget bounce and recover his party’s tarnished reputation for economic competence.
On Wednesday, the Chancellor of the Exchequer will emerge from Number 11 Downing Street, red box in hand before delivering his Budget. The annual Parliamentary set piece will likely be Jeremy Hunt’s last opportunity to make a major economic intervention before a general election.
The Chancellor will have to juggle competing and conflicting priorities. High but falling inflation, high interest rates, an economy in recession and taxes at their highest level since the second world war. Local councils and public services are also competing for much needed spending injection.
So will the Chancellor have the fiscal headroom to manoeuvre the economy (and his party) to a healthier position before the starting pistol is fired for a General Election?
The UK is expected to go to the ballot box in 2024. The Prime Minister has signalled a general election would come in the second half of the year. However, a well-received budget could provide a springboard for a May contest.
Current opinion polling doesn’t look encouraging for the Conservative Party and may yet prevent them from to hurrying the nation to the voting booth. Pollsters put the party 17-20 points behind Labour.
Perhaps more damning still for the Conservatives’ electoral hopes is the polling that suggests they have ceded their position as the as the party most trusted to manage the economy to the opposition.
The State of the Finances
Since entering Downing Street following Liz Truss’s cameo in the top job, Rishi Sunak has faced an uphill challenge to rebuild business confidence in an economy still reeling from the shellshock of the Autumn 2023 mini-budget.
During Jeremy Hunt’s tenure at the Treasury, global economic headwinds have calmed, allowing inflation to subside to 4.2% - meeting the Conservative pledge to half inflation. But UK Interest rates remain stubbornly high, raising the cost of borrowing.
The Government faces its own debt challenge, which according to the Institute for Fiscal Studies saw the UK borrow £63 billion more last year than predicted in the 2022 forecast. Debt interest alone stands at nearly 4% of national income.
Many backbench Conservatives will be desperate for the Mr Hunt to summon the spirit of Mrs Thatcher’s tax slashing Chancellor, Nigel Lawson to reinvigorate the economy and the Conservative Party’s chances of re-election.
But the Chancellor faces an incredibly tight fiscal reality. The Office for Budget Responsibility have reportedly provided an unenthusiastic analysis of Mr Hunt’s growth measures, down grading the treasury’s own analysis of his fiscal headroom by £2bn.
Tax Cuts
Mr Hunt has spoken of his desire to deliver “smart tax cuts” that boost growth and work, favouring a cut to National Insurance (NI) paid by working people. A 1p cut in NI would cost £5bn, as opposed to a 1p cut in income tax which would cost the Exchequer £7bn.
The IFS suggest public capital investment may be a victim in this budget, with forecasts likely to show a £20bn cut over the coming years to meet the Governments fiscal rules, further impeding economic growth.
The Financial Times reported last week that the Chancellor faces so little headroom to conjure cuts to personal taxation that he is considering scrapping the non-domiciled tax status, with Bloomberg reporting he is considering extending the windfall tax on excess profits in the oil and gas sector.
Both are moves which have been long opposed by Conservatives but popular with the public. Most importantly they are key Labour manifesto pledges and central to Shadow Chancellor, Rachel Reeves’s spending plans.
If the Chancellor follows this path, the odds on a May election will shorten sharply.
House Building
Many will hope the Chancellor will use the Budget to boost housebuilding and home ownership. There’s a political imperative as the Conservatives look to revive their appalling poll ratings with those under the age of 40.
Policies such as reintroduction of ‘Help to buy’, new low deposit “lifetime mortgages”, and the abolition of stamp duty have been trailed in the press as levers open to the Chancellor to boost demand.
However, given the Labour Party’s recent commitments to overhaul the UK’s planning system, the development sector will perhaps be listening for the Government to make meaningful commitments to improving housing supply.
It is abundantly clear from housebuilding and development leaders, that the sector needs more than piecemeal reform and short-term policy announcements.
Since 2009 planning budgets have halved and exacerbated supply issues. The Home Builders Federation have long called on the Chancellor to boost resources available to local planning authorities in order to speed up approvals.
Final Thoughts
Ahead of the budget, the UK’s public finances appear far tighter than the opinion polls.
The key question for the Chancellor is whether to favour a few short-term headline grabbing policies or adopt a more strategic long-term approach which puts the UK on a more stable path to increased prosperity.
Adopting the latter requires time for voters to see policies take their effect, and time is the one thing in a shorter supply than money to a Chancellor facing an imminent election.