Last Updated on Thursday, 14 March, 2024 at 9:56 am by Andre Camilleri
Lina Klesper is an international legal assistant at PKF Malta
UK Chancellor Jeremy Hunt announced his Spring Budget 2024 on Wednesday 6 March, three and a half months after his autumn statement.
The Government’s plans for the economy, including taxation and spending, were announced along with an economic and fiscal outlook published by the Office for Budget Responsibility (OBR). An important question attached to the Spring Budget announcement is whether the UK economic recovery is gaining momentum. Expectations were high, considering it is most likely the last budget before the general election to be held later this year. Subject to speculation has been primarily tax reductions such as a cut in the basic rate of income tax or a further tax in national insurance. With the Spring Budget, the Government is expected to take on the short-term effects of the pandemic and broader problems caused by poor decision-making from previous governments over decades.
The UK economy has been grappling with significant challenges. Since the beginning of 2022, economic growth has been stagnant due to high inflation and rising interest rates, dampening economic activity. The last two quarters of 2023 saw a decrease in GDP, marking a technical recession and undermining the Government’s commitment to economic growth. Despite the Government’s achievement of a record budget surplus in January, experts are sceptical about its potential to counteract recessionary factors if they persist. The OBR, the UK’s independent public finances watchdog, forecasts that the UK’s inflation rate will fall below 2% by the end of June, a year earlier than previously expected. The growth forecast for 2024 was only revised slightly from 0.7% to 0.8%. This is, however, an improvement over last year, which saw a growth rate of a pale 0.3%, with a technical recession accounting for two negative quarters. The economy seems to be picking up pace in 2025, where the growth was revised to 1.9% from 1.4%. The budget’s announced policies are expected to raise GDP by 0.3% over the predicted period. However, toward the conclusion of the prediction period, this fades to zero in accordance with the OBR’s method of modelling this kind of effect. Thus, the question arises whether the budget will be enough to revive the stagnating economy.
With his Spring Budget, the Chancellor aims to deliver lower taxes, more investment, and better public services for long-term growth. As anticipated, a further cut to national insurance contributions employees paid was one of the significant measures. In autumn, the insurance contributions were already reduced by 2% from 12% to 10%, with a further 2% cut now under the Spring Budget. UK families can also benefit from child benefits to be paid to more families and the fuel duty on petrol and diesel frozen for another year for the 14th year in a row. While pubgoers were declared winners due to an extension of the freeze on alcohol duty until February 2025, smokers were declared losers due to a new tax on vaping products from October 2026 with a complementary rise in tobacco duties to ensure vaping remains cheaper. The Spring Budget foresees cuts and savings in the public sector as revenue-raising measures to the detriment of unprotected government departments.
What Hunt’s Spring Budget announcement failed to mention is climate change. Although the windfall tax on energy firms’ profits was extended until 2029, the money raised with this windfall tax is not directly committed to new climate investments. Policies for transitioning away from fossil fuels and for low-carbon technologies, such as electric vehicles and heat pumps, were also missing. At least £120m has been allocated for a government fund that invests in green energy projects. Moreover, new details about a new round of renewable energy projects auction, which could secure 3-5GW of new offshore wind, were released. The UK has a target of 50GW of offshore wind by 2030, whereas currently, 21GW still need to be realised.
For some, this Spring Budget certainly presents a picture of economic recovery and resilience crucial for the upcoming elections. For others, the budget does not do enough to put public services back on track. It has the connotation of a pre-election, raising doubts about favouritism towards short-term electoral fortune as opposed to sustainable public finance improvement and investment in public services. The Spring Budget does not seem to be set out for significant growth. Fiscal headroom will be severely limited, and the UK will remain with a parliament of record tax rises, leading to a tax rate above 37% of GDP by 2028, the highest in modern times. The general conclusion has to be that Hunt’s announcements will not shift the dial on the UK economy. It will remain to be tested how carefully crafted the fine print of the Spring Budget is, and time will tell if the final Spring Budget Bill holds up the promise of more investment, more jobs, better public services, and lower taxes.
