Don’t get your Budget hopes up – the Chancellor looks snookered

The Chancellor is increasingly hostage to fortune with limited Budget choices, and with an election looming, competing demands within his own party, Paul Montague-Smith, senior counsel – public affairs at MRM writes

Next week’s Budget is almost certainly the last before the country goes to the polls later this year.

Despite cutting National Insurance in November’s Autumn Statement, the public reacted with a collected ‘meh’, perhaps because they knew the tax burden was still set to be the highest for 70 years.

More probably because the effects of inflation and higher interest rates meant they felt far worse off, despite the Chancellor’s positive spin on his package. GDP per head – one of the best measures of prosperity – fell by 0.7% in 2023, having fallen every quarter since early 2022 – the longest unbroken streak since comparable records began in 1955.

As this pre-election Budget approaches, the Conservatives remain stuck at 20+ points behind Labour in the polls. It’s thought Labour needs a swing just shy of 13 per cent to secure a parliamentary majority – more than the remarkable 10.2 per cent Tony Blair achieved in 1997 – but they are clearly well on course to get the keys to Downing Street.

So next week, something big needs to happen to shift the dial for the Conservatives. Steady as she goes doesn’t seem to be a winning formula. But the Chancellor is seriously hemmed in.

Over the last five months the public finances have performed worse than forecast. It’s thought the amount that he has available to play with has fallen from £25 billion to around £13 billion. His fiscal headroom was thought to be wafer thin last November and to fund the NI cut and meet his own rules he relied heavily on future unspecified savings in public spending.

Many commentators were highly sceptical about the Government’s ability or willingness to find such savings. Relying on more of the same – presaging an effective return to austerity after the election – to fund a pre-election give-away would raise serious questions about his credibility.

But he also knows from the ‘Kamikwasi’ budget under Liz Truss that bare-faced unfunded tax cuts will spook the markets, so he can’t go there.

If he only has £13 billion to play with, he can’t do much and what he can do won’t have much impact. A 1p cut in income tax costs around £7 billion a year. A further cut of 1p in national insurance would cost about £5 billion.

Freezing the planned increase in fuel duty for yet another year would cost around £1bn a year in lost revenue. So that £13 billion would already be gone, without anything being spent on promoting growth in our stagnant and productivity challenged economy.

What has been floated or asked for? The wight wing of the Tory party (including another new movement the Popular Conservatives – or PopCons – involving Liz Truss) of course want tax cuts to promote growth. Income tax is a priority for them, but a further cut to national insurance would also be welcome from their perspective.

Much of the extra revenue from the last Budget is due to come from the freeze to income tax and national insurance thresholds until 2028, which will deliver around an extra £10 billion a year. The Chancellor could row back on some of that, but it’s unlikely to be a sexy headline grabber easily understood by voters.

Many on the right of the party also want to see inheritance tax abolished. It raises £7 billion a year but is paid by only 4% of the population. Abolishing it pre-election would be a political gift to Labour. The Chancellor could, though, adjust thresholds to reflect rising property values or change the rate at which it is paid.

UK Finance and TheCityUK have been calling for the abolition of stamp duty on share purchases. That would cost £3 billion a year and is unlikely to be a priority for the Chancellor, who if anything will probably see more political advantage in doing something on stamp duty for house purchases.

There’s speculation, though, that help for first-time buyers could come in the form of a state backed 99% mortgage scheme. Such a new policy would need to go through a consultation process so even if it is announced, it is unlikely to be implemented before the election.

Helping first-time buyers get leveraged to the max must raise concerns about affordability, the increased potential for negative equity and pushing house prices up further, when the real underlying issue remains supply.

Following campaigning by Martin Lewis, the Chancellor has hinted he might tweak the Lifetime Individual Savings Account limit to reflect rising house prices, and for withdrawal charges to be reduced to make the scheme a more attractive and help more people get on the property ladder.

Maybe the final pre-Budget forecasts from the Office for Budget Responsibility will give the Chancellor much more room to play with than currently thought. Maybe he will pull out a big attention-grabbing rabbit from a big hat. But on the face of it, he’s snookered by circumstances.

It’s the price the Conservatives – and we as voters – are now having to pay for the £500 billion the country has spent supporting individuals, households and businesses through Covid and the cost-of-living crisis. The credit card can delay the day of reckoning, but the reckoning always comes, with interest.