Client Update - 1st March 2024

This week all eyes are on the upcoming annual UK spring budget set to take place next Wednesday. Anticipation surrounds this significant event and its implications for UK taxpayers and the economy overall. Adding to the intrigue is the fact that it is likely to be the last major financial statement before the next general election. With the Tories languishing low in the polls, will this be a budget of bribes? 

Jeremy Hunt, Chancellor of the Exchequer, will address the House of Commons and present an official overview of the national economy and the government's proposed taxation adjustments. Ahead of this, the weekend press will be alive with rumours and half-truths as the government pre-release the important policies to test the reaction, a process known as “briefing”.

While Hunt may have hoped for a more favourable economic backdrop, given the UK's technical recession and the Bank of England's conservative growth forecasts, there is a silver lining. Tax revenues hit an all-time high in January, potentially giving the chancellor more “fiscal headroom” in this budget.

Fiscal headroom is a term that describes a government's ability to boost spending or cut taxes without jeopardising its financial stability. Typically, it is measured by comparing actual levels of public debt or deficits to predetermined sustainable thresholds. In essence, it is the financial breathing room a government enjoys. 

According to some analysts, the potential fiscal headroom for this Budget could range from £15 billion to £23 billion. However, these estimates may increase further if reports of planned public spending cuts to facilitate further tax reductions are accurate. Last week the Resolution Foundation calculated such a move would mean taking a fifth out of budgets for certain departments across the parliament, sparking concern among economists, trade unions and even some Conservatives MPs.

Additionally, the International Monetary Fund (IMF) has cautioned the UK against pursuing tax cuts, warning that such actions could exacerbate the country's already burdensome debt levels. This warning from the IMF’s chief economist came at the end of January as they warned Britain’s Conservative government not to cut taxes in the run-up to a national election expected later this year, due to high levels of public debt and growing demands on services. He highlighted growing demands for health and social care, education, and environmental investment.

Despite this warning, the Conservatives will want to re-establish their credentials as the party of low taxes. Reportedly, Hunt has informed colleagues that the Spring Budget will prioritise “smart tax cuts” aimed at fostering growth and incentivising work.  It will be challenging for the chancellor to avoid the temptation of doing something significant, especially with the looming general election and the Labour Party currently leading the polls by 21%.  They will also have to strike a responsible tone to avoid a repeat of Kwasi Kwarteng’s disastrous budget during Liz Truss’s brief, but damaging, 50 days in office.

We eagerly await the unveiling of the upcoming budget and look forward to updating you on what it means for you and your finances.

According to tradition, the Chancellor is permitted to enjoy a tipple during the Budget speech. Previous Chancellors have embraced this custom with Kenneth Clarke favouring whisky, Geoffrey Howe opting for gin and tonic, and Benjamin Disraeli enjoying a brandy and water. Whatever Hunt's choice of beverage may be, taxpayers will be hoping to be sipping champagne after next week's announcements. Do have a good weekend.