Analysis overview from David Laws, GK Strategic Adviser
Before this week's Budget, the Chancellor talked about how truly historic Budgets can have a game-changing impact on the economy and society. But it was clear when he sat down after making his Statement on Wednesday that this was not such a historic Budget.
This was almost certainly a (pre) pre-election Budget where the Chancellor and PM are hoping to buy back a bit of support by announcing cuts in tax which will be funded by public borrowing, more or less up to the limit of what the independent Office of Budget Responsibility will allow.
The tax that Hunt and Sunak have chosen is (again) employee national insurance - a less well known and less popular tax to cut than income tax, but a more affordable option as it is not charged on pensions and savings income. Significantly, Hunt seemed to indicate that the government now has a long-term aim of scrapping this tax, which would cost roughly another £40bn to achieve, and is not therefore going to be achieved anytime soon, if ever.
The other significant announcement in the Budget was on public spending. Hunt sensibly did not cut the overall real growth rate for public spending of 1.0% beyond the 24/25 tax year, and he said there would be no Spending Review until after the next General Election. The reason for both announcements is obvious - the government's current spending allocations are implausibly low and could not be delivered without more austerity, which is unlikely to be politically acceptable. So, the Conservatives are leaving to the next government the tricky job of making all the tough spending decisions for the period from April 2025. Until then, departments will just have to guess what their budgets might be next year - not an intelligent way of running government or helping deliver productivity improvements. The problem is that once you have allocated a sensible amount to the NHS and to deliver current defence and childcare pledges, there is no money left - worse still, at present there would probably need to be spending cuts running to £20bn per year by the end of the next Parliament.
Where might one possibly find the missing £20bn? Well, interestingly, it just happens to be the sum the government happens to have utilised to take 4% off employee national insurance contributions this year. No wonder the public is sceptical - tax cuts now are highly likely to be followed by tax hikes after the next election. No doubt it won't be the same taxes, but other revenue raising targets will need to be identified.
And what about the timing of the election and what comes next? Well, no serious person is going to voluntarily call a General Election when they are 20% behind in the polls and heading for an electoral catastrophe. There is only one strategy the government can follow if it has any sense: plan for an October/November election; hope inflation falls to 2% by Spring; hope the Bank of England starts cutting interest rates soon after; hope the growth outlook improves; hope the OBR revises up its growth forecasts and gives the Chancellor more room for tax cuts; hold an October Autumn Statement; announce more cuts to taxes such as employee NICs (now rebranded the "jobs tax" to make it sound more unpleasant), and maybe inheritance tax; and time those tax cuts in April 2025 to set a trap for Labour - i.e. reverse the tax cuts and upset voters, or have to fill a bigger hole after the election.
It is a plan, but there are no signs that it is working. Why is that? It is for three reasons. Firstly, the Truss government destroyed the government's economic credibility, in the same way as our departure from the Exchange Rate Mechanism in 1992 ruined the reputation of the Major government. Once lost, a reputation for economic competence is very hard to recover. Secondly, because voters are sceptical about government tax cuts - they know that their tax allowances are frozen, and the overall tax burden is heading back to its post war high. Finally, because real incomes are stuck at a level no higher than their 2019 level, and many people are struggling badly to make their finances add up. Oh, and the government has also failed to deliver on other public priorities such as the NHS and immigration.
All this points to another fiscal event later this year, an Autumn election, and a new government that will need to pick up the pieces. Only the opposition parties are going to be happy with this Budget.
A focus on Health and Social Care
Analysis from Phil Hope, GK Strategic Adviser
Across the health and social care sector, it is perhaps the absence of announcements in this budget that will worry people most.
There was no mention of adult social care at all in the Chancellor’s speech – the staff shortages, high turnover and low pay of a sector that has 1,520,000 workers and contributes £55bn to the economy has been completely ignored. The promise at the start of this parliament to ‘fix social care’ has been forgotten. No extra financial support for Local Councils to increase fee levels to help care providers pay the extra costs of the rise in the National Living Wage. This will put unaffordable pressures on many social care providers and could well mean more contracts being handed back to local councils leading to more cuts in social care services and greater pressure on the NHS.
The combined effect of cutting NI and freezing income tax thresholds means people earning less than £25,000 – hundreds of thousands of care workers – could well be worse off.
On the health system, the £3.4bn NHS IT productivity deal over the next 5 years is welcome. But no extra capital for sorting out the crumbling NHS estate means overall productivity improvements may not be achieved.
The £2.4bn extra for next year will do little to help tackle the lengthy waiting lists and long waiting times for acute care. And there is no extra investment in primary and community care to help the shift of care out of institutions and into the community that the health sector has been calling for.
If this budget does not create an electoral bounce for the government over the next 2 weeks, we can expect the general election to be delayed until later in the year when the economic outlook may look better and create room for a further final ‘fiscal event’ in October to win over voters.
Click here to download the full GK Strategy Spring Budget 2024 Briefing
Contributors
David Laws, Strategic Adviser
Phil Hope, Strategic Adviser
Ibrahim Zafar, Senior Associate
Josh Owolobi, Associate
Sam Tankard, Associate
Hugo Tuckett, Associate
Noureen Ahmed, Adviser
Rebecca McMahon Adviser