Budget 2024 : Fixing The Foundations ... The Bond Market Vigilantes Look On ...

We were promised a budget for growth. In reality it looked like a classic Labour Budget, taxes up, spending up, borrowing up. Debt set to average almost 100% of GDP, tax revenues set to hit 38% of GDP. Government spending set to average 45% of GDP.

The Prime Minister had promised to reach for the Growth Lever. Instead, the Chancellor grabbed the Tax Lever increasing the tax burden by a massive £40 billion.  

As for growth, the Office For Budget Responsibility suggested output would be little changed at the end of the forecast period. A sugar rush of government spending would generate a growth surge of almost 4% over the first two years of the plan. Thereafter economic growth would moderate to an average 1.5% over the period 2027 to 2029.

Are the growth forecasts so bad? Growth in the UK was just 0.1% in 2023 and an expected out turn of 1.1% in 2024. Many commentators would settle for base line, non inflationary growth of 1.5% over the medium term.

Should we place any reliance on the OBR forecasts more than two years out? Time will tell if the forecasts will be realised to any degree of accuracy. Too soon to hoist the Chancellor by that particular petard.

Government spending on investment is set to surge by 6% in 2026 and by £100 billion over the next five years. The investment spending will boost growth. The problem it may take a stretch into a second parliamentary term to realise the real gains in National Income levels.

Inflation CPI is set to increase to 2.6% next year and 2.3% in 2026, returning to target 2% by the end of the forecast period in 2029.

Unemployment is set to average 4.1% over the five years. Moderate growth, low inflation and stable employment levels, what’s not to like?

Spending Plans ... 
Chancellor of the Exchequer Rachel Reeves delivered a Budget to “Fix the Foundations of Our Economy.” It could have been called, “Mopping Up The Mess” of fourteen years of Tory mismanagement.

The Government inherited a £22 billion Black Hole. In reality it was more like a £9.2 billion pothole. The incoming government had to tackle the problem of public sector pay, setting the issues of conflict with Junior Doctors and other NHS staff. Public Sector Net Borrowing was set to hit £120 billion this year, well before the Budget numbers revised the spending plans.

The good news is the budget spending plans recognised the commitments to compensate the victims of two major public scandals. Some £11.8 billion will go to those impacted by the infected blood scandal and £1.8 billion will be paid to victims of the Post Office Horizon debacle.

On day to day spending, the Red Book states “The Chancellor plans to protect public services as departments’ day-to-day spending is set to grow by an average of 3.3% in real terms between 2023-24 and 2025-26, including an increase of more than £22 billion for the NHS to help bring down waiting lists and £4 billion for the education sector to stop schools falling down.

The Budget will provide a boost to public investment by over £100 billion over the next five years across roads, rail, schools and hospitals. Public Sector Investment will average 2.5% of GDP over the period compared to a planned fall to 1.7% under the Tories.

Tax Hikes  ...
The Budget confirmed increased National Insurance contributions for employers, higher stamp duty on second homes, and the removal of the VAT exemption on private school fees. Passenger levies were also hiked on private jets.

The budget’s biggest measure, the £25 billion rise in national insurance came under pressure from the IFS. “It will not get them anything like the £25 billion stated on the scorecard,” Paul Johnson said. “The OBR noted it will result in lower wages, lower hours and some job losses. This will reduce the amount raised from employer national insurance, employee national insurance and income tax revenues.

Tom Peck writing in the Times claims the day after a budget, no one really cares anymore what the chancellor has to say. The only view that really matters is that of Paul Johnson, the head of the Institute for Fiscal Studies, who has for some years hosted a post-budget briefing. He sits in his corner office and systematically dismantles everything that was said the day before.

If you were being gentle, you’d call it the budget’s elephant graveyard. Really it’s a budget abattoir. Budgets don’t fall apart, he rips them apart.

“I’m afraid this looks like the same game playing we got with the last lot,” Johnson said. He gently pointed out that all the government departments who’ve been given 4 or 5 per cent budget increases this year, aren’t going to be placated by the projected 1 per cent increases thereafter.

This, he said, was: “Pencilling in implausibly low spending commitments in the future, in order to make the arithmetic balance, repeating the same silly manoeuvres.”

He pointed out that future projections also depended, for example, on ending the freeze on fuel duty, which has been in place since 2011, because no chancellor would dare.

Not in a Happy Place … The Bond Market Vigilantes Look On …
The Chancellor’s plans prompted an adverse market response, with ten year government bond yields rising to 4.5% yesterday before easing back to 4.4% at close of week. Hardly a Liz Truss moment but enough to set off tremors in the Treasury and raise fears of a Gilt Strike.

Ratings agency Moody's said British finance minister Rachel Reeves' first budget will create new challenges to efforts to strengthen Britain's public finances, with the UK still facing muted growth, the Financial Times reported on Friday.

While the NHS stands to benefit, other sectors face challenges. GPs, care homes, dentists, and hospices are pushing back against the National Insurance hike, while farmers worry about inheritance tax forcing them to divide family land. Rural communities are also questioning a 50 per cent increase in the bus fare cap.

Hospitality and retail business are reeling from the 6% hike in minimum wage compounded by the increase in National Insurance. Business closures and job losses may follow.

Chancellor of the Exchequer Rachel Reeves delivered a Budget to “Fix the Foundations of Our Economy.” Let’s hope so … The Bond Market Vigilantes Are Watching ...