A pick and mix budget that’s more sesame street than quality street

Having come off the back of weeks of endless speculation on what the Chancellor might announce in today’s budget it’s hard to remember a more chaotic backdrop to a fiscal statement.

From endless trial balloons on possible changes to pension and ISA thresholds, council tax bands, changes to national insurance, income tax and VAT thresholds, additional bank surcharges, as well as numerous other trial balloons the various leaks kept on coming.

Even in the aftermath of the hastily arranged 4^th November press conference, that had the Chancellor rolling the pitch for a possible increase in income tax, there was no letup in the number of leaks coming from the Treasury.

In subsequent days it quickly became apparent that an income tax increase probably wasn’t going to fly with her own MPs, prompting a sharp reverse ferret which came in the form of more leaks suggesting the Chancellor was now looking elsewhere to raise extra money.

Rolling forward to today there wasn’t much left in the way of surprises given that most of today’s statement was heavily briefed about yesterday.

Nonetheless there did turn out to be one more sting in the tail in what can only be described as the most chaotic and badly managed build-up to a budget ever, after the OBR uploaded the entire budget an hour before the Chancellor was due to stand up in Parliament and draw a line under weeks of endless speculation.

If ever there was anything more symbolic of the rot and incompetence at the heart of government, and the UK’s institutions then this OBR cock-up was the cherry on the cake.

While the previous Conservative government was bad enough it would appear that Labour appears to be performing the equivalent of saying “hold my beer”.

Having raised taxes over a year ago by over £40bn with a promise not to come back, today’s budget has come back with a further £26bn to £30bn, in order to give her a fiscal buffer of £22bn.

OBR projections

The OBR now expects the UK economy to grow by 1.5% in 2025, up from the previous 1%, but by only 1.4% in 2026, down from 1.9%. On inflation the OBR says it expects headline CPI to slow to 2.5% in 2026, down from 3.8% currently.

Main tax measures

Having backed off from raising income tax rates it had been well trailed that the Chancellor would have to adopt a pick and mix approach in order to reach her fiscal targets, sadly the approach has been less Quality Street and more Sesame Street.

Today’s main tax measures have come in the form of a further freezing of income tax thresholds until 2030/31, thus pushing more lower rate taxpayers into the upper tax bracket due to fiscal drag.

The Chancellor also announced that salary sacrifice NI thresholds for pension contributions would be cut to a limit of £2,000 from 2029, an utterly moronic measure that will only discourage savings into private pension plans at a time when we should be encouraging people to save more for their old age.

She also cut the annual cash ISA limit to £12k from £20k from April 2027 for under 65’s.

There will also be higher taxes on income from dividends, rising to 10.75% for basic rate taxpayers and 35.75% for higher rate taxpayers from April 2026. There will also be tax increases on savings and property of an extra 2%, as well as an additional tax on properties valued at more than £2m or more, from April 2027.On the subject of the stock market there was a welcome stamp duty exemption on new company listings for up to 3 years, with some suggesting that it would make listing in the UK more enticing, however that’s hard to square with the idea that you will be taxed even more on any dividend income that might come your way.

Electric cars will now be subject to a 3p a mile charge from 2028, while fuel duty will stay frozen until September 2026.

There’s also a new sugar tax on shop bought milk-based drinks from January 2028, although cafes, restaurants and coffee shop drinks will be exempt.

The Chancellor also announced that the minimum wage for workers aged 21 and over would rise by 4.1%, while uplifting those workers between 18-20 by 8.5%, a highly contentious move that could well make it more difficult for the Bank of England to cut interest rates further in the coming months.

Effects

In heaping additional staff costs on businesses, which are already struggling with higher costs, the risk is that prices will continue to rise so that margins can be maintained.

We’ve already seen the effect last year’s measures have had on the unemployment rate which was 4.3% a year ago, and has since risen to 5% for the 3-months to September. Inflation is also likely to be much stickier as a consequence, along with wages growth.

This is especially concerning given that the 18-24 age group cohort of workers account for a much higher percentage who are currently out of work to the tune of 12.7%, according to the ONS.

The announced increase in welfare spending today of more than £15bn, including the lifting of the two-child benefit cap, on top of last year’s £25bn public sector splurge, is also hard to square with her claims that she inherited a host of problems from the previous government.

Increases in both tax and spend is a choice, and while today’s budget may have gone down well within her party it’s hard to see how it will improve the outlook for the UK economy more broadly, if incentives to work harder continue to get lowered, or penalised.

The Chancellor can talk all she likes about being left with a toxic legacy and any number of fiscal black holes, however it has become increasingly apparent in recent weeks that the only black hole of any note, is the one that seems to exist between the ears of this particular government, when it comes to any understanding of economic policy and incentives.

On the plus side initial market reaction has been positive in the form of a rebound in the pound, as well as a decline in gilt yields, however we did see a similar initial reaction over a year ago before reality set in, and it became apparent that most of the OBR’s projections would have to be revised lower.

There is also a concern that all of the tax rises have been backloaded, while all the spending increases have been front loaded. This could well cause further bond market concern, when and probably if unemployment continues to rise further, and expected tax revenues decline heading into next year if the economy continues to struggle.