Economy in brief: March 2024

Key takeaways from the Budget

The headlines from the Budget are well known, but nonetheless a brief recap. Another 2p cut in NICs – and the expressed intent for its demise – and another freeze in fuel duty, part paid for in future years by a change in the tax system for non-doms, the extension of the North Sea oil and gas windfall profit levy, scrapping tax breaks for the owners of holiday rentals, taxes on vaping. In short, £14 billion of giveaways today for about £6.6 billion in takeaways by 2027/28. The CBI was pleased to see the extension of permanent expensing to leased assets – though date of implementation tbc… – the expansion of funded childcare, funding for advanced manufacturing innovation and funding for the Green Industries Growth Accelerator in particular. But we were disappointed by the absence of announcements on occupational health and not enough on a net zero strategy.

What did the OBR make of the Budget?

The OBR has been increasingly vocal regarding the transparency of the public finance outlook as departmental budgets, which account for 40% of public spending, have only been set through to April 2025. The government’s intention to continue to raise day-to-day spending in real terms falls flat against the OBR’s analysis that real per person spending on public services no longer grows over the next five years. The headline support for household incomes is more than offset by the freeze in income tax thresholds which raises roughly double what the government has given back via NIC cuts, and the overall tax burden continues to rise to 41.2% of GDP by 2028/29.  Meanwhile, the government’s claim that the fuel duty freeze will only be for 12 months, is contrasted with the reality that it has been frozen every year since 2011. This calls into question £4.5 billion of the Chancellor’s £9 billion of fiscal headroom. These issues have raised broader questions over the usefulness of the current fiscal rules. Debate is ongoing on what the optimal fiscal rules are, but as Charles Goodhart said, “any measure that becomes a target becomes a bad measure”, so the perfect rule may prove somewhat elusive.

The Budget and the growth outlook

Following the surprisingly weak 2023 GDP outturn of +0.1%, the OBR have revised up their forecast for growth in 2024 to 0.8% from 0.7% (CBI 0.8%) and in 2025 to 1.9% from 1.4% (CBI 1.6%). This is considerably more upbeat than the Bank of England’s February forecast, which has growth of 0.2% in 2024 and 0.6% in 2025. One of the biggest drivers of the OBR’s forecast upgrade is an increase in the size and expected growth of the UK population following updated estimates from the ONS, alongside lower energy prices, lower interest rates and the fiscal boost from tax cuts in the near-term (worth 0.2-0.3% of GDP). But in future years, this is largely offset by higher inactivity. On action to address productivity, the Chancellor’s Public Sector Productivity plan, which claims that £3.4 billion of funding for NHS digital transformation will unlock £35 billion of savings by the end of the decade, the OBR says only that it “could increase NHS productivity and partially offset the spending growth required to deliver the NHS Workforce Plan.” Future growth needs investment, working people and productivity, and there is clearly much more action needed to get UK economic growth out of the doldrums.