UK's Hunt delivers the pre-election budget

After more than an hour on the podium, the chancellor has delivered the pre-election budget of Tory party dreams. It had another big national insurance tax cut, it was broadly fiscally conservative while keeping public spending plans in place, and the independent OBR growth forecasts were upbeat.

The Budget was more or less as expected, with few surprises. It was a definite election platform, penalizing non-doms and those with second homes, while easing the burden on the lowest paid, providing childcare support and a broad-based national insurance cut. The prospect of a May election is now in play.

The Chancellor confirmed that he will have £8.9bn of fiscal headroom, which he has basically spent on more investment for the NHS and other spending plans, leaving less for Labour to play with if they do get into power at the next election. The fiscal headroom that has been projected is lower than some had expected, however, the focus is not on this at the moment. Jobs up, taxes down, was Jeremy Hunt’s rousing final statement. That sounds like Hunt has kicked off the election race before it’s been announced.

The market impact from this budget has been focused on the FTSE 250, which is loaded with British domestically-focused stocks. It is up by more than 1%. Gilt yields are relatively stable, and the pound is back above £1.27, on the back of the stronger OBR UK growth forecasts. UK self-invest platforms have seen their share prices rise sharply, along with gains for pubs. Vape and tobacco companies are seeing their share prices decline on the back of the vape and tobacco duty increases, although the vape duty will not come into play until 2026, so the share price declines are moderate from here.  

Tax giveaways – A round on Hunt

Hunt saved the best for last and announced the 2p cut to National Insurance in the final moments of his Budget speech. This was well flagged, so there is no surprise here. Some have wondered why the Chancellor has focused on NI cuts rather than income tax cuts, the reason is two-fold: 1, NI cuts impact more people (read, voters) and 2, income taxes are more expensive, and the country doesn’t have the money to cut it.

The chancellor extended the freeze on alcohol duty for another 12 months. Chancellors like alcohol duty freezes in budgets, especially in the run up to an election. They also extended the freeze on fuel duty, which has been extended in so many budgets that it may as well be made permanent.

The Chancellor has also said that the extension of these freezes means that 0.2% will be knocked off inflation. We have said that the chancellor would be at pains not to work against the BOE as it moves towards cutting interest rates. After all, lower interest rates could also boost the Tories’ chances in this election.

Spending plans

Public service productivity is falling, so the chancellor won’t raise spending, but will keep it at 1%. There had been some expectations that this could fall to 0.75% so that the Chancellor could announce potential tax cuts if the Tories get in at the next election. While a 1% increase in public spending is likely a real spending cut due to inflation, the Chancellor has most likely avoided cutting spending plans so that he cannot be accused of delivering an ‘austerity’ budget. He has also listened to the polls; the electorate prefer public spending increases over tax cuts. This is a calculated budget leading up to an election.

NHS

The chancellor announced that the bulk of public spending increases will go to the NHS, he will fund the NHS productivity plan in full at over £3bn. This doubles the amount the NHS is investing in its digital transformation in 3 years. AI is seen as a productivity fairy godmother, so the chancellor may be hoping that investing in AI means that NHS budgets can be cut down the line, but that seems like wishful thinking. Can any politician not give more money to the NHS with an election on the horizon? This has an ‘electoral promise’ all over it, even if these spending plans are based on extremely rosy growth forecasts for the UK economy.

Investment

The British ISA has been confirmed, and the markets are chomping at the bit. The FTSE 250 is outperforming the FTSE 100 today, as UK focused firms benefit from this announcement. Hargreaves Lansdowne is up more than 3% on the announcement, and AJ Bell is higher by nearly 2%. This will have an allowance of £5K on top of existing ISA allowances. This is a big change to the UK’s ISA industry, and it could have positive implications for UK self -invest platforms, such as AJ Bell and Hargreaves Lansdowne.

Some had thought the British ISA would need to come out of the £20k allowance, the fact that the British ISA has its own £5k allowance, is considered a boon for the ISA providers, even if it is a relatively small sum per year. Even so, this is giving a much-needed boost to UK domestic focused firms.

The Chancellor also announced that he planned to unlock pension funds to allow them to invest in UK growth opportunities – we need to know more details about this, Hunt has glossed over the meat of this news, and nothing solid has been announced. For now, this looks like it could be stuck in a talking shop for some time.

Added to this, the NatWest share sale is confirmed for this summer.

Tax increases: These were as expected, hitting smokers and those with more than one home.

• Vaping duty 2026.  

• Increase in tobacco duty.

• Increase in air passenger duty for non-economy flights.

• Confirmation of abolition of furnished holiday lettings regime.

• Multiple dwellings relief – has been abolished.

• Reduction of the higher rate of capital gains tax on property sales, in an effort to boost transaction volumes.

• Non-Dom tax changes to raises £2bn.

OBR forecasts: GDP is more upbeat than expected

The OBR’s growth forecasts are stronger than the BOE’s: they now expect growth to rise by 0.8% this year (BOE expects 0.1% GDP), and for growth to rise by 1.9% next year, the BOE only expects growth of 0.75% next year. It’s worth remembering that BOE forecasts have been revised higher in the past, so it’s somewhat understandable that the OBR has a different forecast to the BOE.

These upbeat growth forecasts will help the Chancellor’s projections for the ‘fiscal headroom’. He confirms that he has £8.9bn. This is lower than the average for the last 14 years and lower than some expected leading up to this budget.

The OBR is also forecasting that real household disposable income will rise by 0.8% this year, which is a big upgrade since previous forecasts were for a fall. However, household income is basically unchanged since before the pandemic, which is a sign of how living standards have been stagnant.

The OBR is also forecasting that inflation will fall below 2% this year. The chancellor does not disclose longer term inflation forecasts, as they are likely to show that inflation starts to rise again in the medium term.