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Spring Budget 2024 – what it means for the UK economy

It was likely the last opportunity for the current government to reinforce their leadership principles ahead of a general election, offering the soundbite of “growth up, jobs up, taxes down”.

The budget threw out few surprises, with the headlines being a 2p cut in National Insurance, a 4% reduction in the higher capital gains tax rate on property disposals to 24%, and the introduction of an extra £5,000 ‘British’ ISA allowance. Further, the removal of the special ‘non-dom’ status for UK residents, means an individual with a four-year UK tax residency will pay tax on their overseas income and capital gains from 2025.

Whilst there is skepticism about the impact of an extra ISA allowance to be invested solely in UK assets, the Chancellor reaffirmed the enforcement of the Mansion House agreement with ten major UK pension funds, potentially driving £50 billion of investment into UK markets, nearly doubling the size of the smaller stock market. This could encourage more companies to publicly list in London given the potential for higher valuations, providing support for UK financial services, which is a significant part of the UK economy.

Our economic consultant, John Calverley, provides his take on the current backdrop and budget impact on the UK economy:

“With energy prices falling and market interest rates off their highs, the outlook for the British economy is improving. The Office for Budget Responsibility (OBR), taking into account the Budget measures, forecasts economic growth of 0.7% this year, 1.9% in 2025 and over 2% in 2026. This comes after a very difficult period starting with the pandemic, then the inflation blow-out due to supply chain disruptions and the Ukraine war, followed by the Bank of England’s efforts to curtail inflation by raising interest rates.

Generally, the Budget is supportive for short-term growth due primarily to the cut in National Insurance contributions which will boost consumer spending. That said, the OBR forecasts that the total tax burden as a percentage of GDP will rise to 37.1% of GDP in 2028-9, up 4 percentage points from the pre-pandemic level. This is mainly because of the freezing of tax thresholds and the rise in corporation tax.

“Importantly, the Budget does not ‘rock the boat’ the way that the short-lived budget from Kwasi Kwarteng did in September 2022. The budget deficit is forecast to fall from 4.2% of GDP this year to 1.2% in 2028-9.

“However, in practice businesses and investors are braced for change in 2025 (or possibly before if an election is called early). In a sense, the uncertainty is greater after the Budget because Labour is even more boxed in on spending now that one of its proposals, ending the non-domicile tax regime forecast to raise £3.1 bn, has been taken up by the Conservatives.

“What then of the outlook for longer-term growth? A key reason for the UK’s disappointing economic performance, really since the Global Financial Crisis in 2008, is that productivity – output per worker – has grown very slowly. A big step was taken in 2023 with the move to full expensing for investment in plant and machinery, because new equipment is often a route to higher productivity, and there are encouraging signs that overall investment is picking up after flatlining from 2016 onwards due to the uncertainty after the Brexit referendum.

“In this Budget the cut in National Insurance contributions is expected to induce about 100,000 extra people into work, doubling up the cut announced last year. The Budget also includes an important emphasis on improving public sector productivity with extra spending for IT in health and justice. However, the change in taxation on non-domiciled people could impact negatively on long-term growth. Many will leave, taking with them potential new investments and innovations.

“Overall then, it is hard to argue that this budget has transformed the growth outlook, but then few budgets do. The good news is that the damage to economic growth and living standards from outside events is probably over now (barring new events) and so the economic outlook should gradually improve.”

If you have any questions about the announcements in the Spring Budget, please do get in touch.