Spring Budget - Moving the political dial

Today’s heavily trailed Spring Budget demonstrated the difficulty the government will have in moving the political dial before the General Election.

Chancellor Jeremy Hunt has been operating under tight fiscal margins after ONS data showed the UK entered a ‘technical’ recession at the end of 2023. Nonetheless, news from the OBR that the government had more than halved inflation since November 2022, the top priority on Rishi Sunak’s 5-point plan, gave Hunt the confidence to cut taxes for a second time, in what could be their last opportunity to appease voters.

According to the OBR forecast today, the economy is expected to grow by 0.8% this year and 1.9% in 2025. That is slightly stronger than the 0.7% and 1.4% growth rate expected at the time of the Autumn Statement in November.

In this economic context, it was no surprise that Hunt’s speech was marked by a series of smaller scale changes rather than big policy interventions. Instead of an injection of cash to target waiting lists the Chancellor chose to announce an ‘NHS Productivity Plan’ to support a digital transformation within the NHS. On housing, a capital gains cut for residential properties was announced, but no sign of the rumoured Stamp Duty holiday for buyers.

At the heart of his speech was the 2p cut to national insurance, a measure that will partly be funded by abolishing the non-domicile tax status by 2025. This highly political move puts Labour on the backfoot by forcing Starmer to endorse the personal tax cut in his response, while creating a major challenge for a new Labour government, who have already allocated the money changes to the non-dom status will raise to the NHS.

There was also a notable continuation of existing commitments, with the freeze on alcohol duty and fuel duty both extended for a further 12 months. A U-turn on the household support fund, scrapped in the Autumn Statement, to provide an additional six months of funding also speaks to the Chancellor’s plan to push tough decisions until after the General Election, setting potential traps for a Labour government.

Whilst some fiscal headroom will be created through measures announced today, the reduction in national insurance will lead to a tighter squeeze on public services at a time when local councils are increasingly struggling with their budgets.

In his response, Labour Leader Sir Keir Starmer accused the government of “delusion” and “giving with one hand and taking more with the other”. He was quick to highlight that theft of Labour’s non-dom policy signalled “a government bereft of ideas”, and warned about stealth taxes that would swiftly follow through council tax.

However, pressure is now on Starmer and Shadow Chancellor, Rachel Reeves, to show how a Labour government will deliver economic growth and public sector reform without increasing taxation. This will become a lightning rod issue in the General Election.

Governments have a longstanding history of reducing taxes before a General Election to put more money in their voters’ pockets. However, there is scepticism within sections of the Conservative Party that today’s national insurance reduction will be enough to shift the political dial, after the Autumn Statement’s giveaways failed to do so. All eyes are on the polls over the coming days, as pressure grows on the Prime Minister and the Labour Leader, who now must navigate the fallout from today’s Budget.