All Eyes on Hunt’s Budget

Word of the Week Wednesday

Fiscal Headroom: The amount a government can cut taxes or increase spending within their own fiscal rules. Such fiscal rules aim to build government credibility in the markets while also keeping public finances in check.

During his Autumn Statement, the Chancellor Jeremy Hunt pledged to shrink debt relative to GDP in the financial year 2028/29. According to forecasts across the City, the Treasury is estimated to have around ￡15-20bn of 'headroom' (equivalent to around 0.7-0.9% of GDP) between its existing fiscal plans and hitting this target.

That said, either softer-than-expected growth or higher-than-expected borrowing would weaken the Government's fiscal headroom.

Attention now turns to the extent to which Hunt will translate such 'fiscal headroom' into fiscal loosening measures during his Autumn Statement later today, either through tax breaks or public spending increases.

All Eyes on Hunt’s Budget

All eyes will be firmly focused on Westminster this afternoon, where the Chancellor Jeremy Hunt will announce the Budget, in what is widely expected to be the last such announcement before a general election. With today’s budget also considered to be one of the Government’s last set pieces before the electorate head to the polls nationwide, the Chancellor will be looking to muster support and ease the Conservative’s gap in the polls.

As has been widely reported both here and elsewhere, headlines concerning today’s Budget are centring on an expectation that National Insurance for workers will be cut by two percentage points – or 2p in the pound. Given that it was cut by 2p during Hunt’s previous Autumn Statement, this would equate to the primary rate in National Insurance Contributions falling from 10% to 8%. Roughly speaking this would see the average worker’s take home rising by some ￡450.

As we looked at yesterday a 1p cut to employee national insurance contributions would cost some ￡5bn a year (some ￡2bn less than a 1p cut to the basic rate of income tax).

While headlines continue to speculate on the prospect of tax breaks, it will not be lost on No.11 that earlier last month we learnt the UK economy slipped into recession following two consecutive quarters of economic contraction over Q3 and Q4 2023. Here, GDP fell 0.1% over Q3 and 0.3% throughout Q4. When looking at 2023 as a whole, the UK economy recorded sluggish growth of just 0.1%, falling well below the US which grew 2.5%, and the Eurozone’s 0.5% growth.

As such, it is expected that Hunt may announce changes to the UK’s non-dom tax status in order to help fund the easing on NI contributions. With some 68,000 Nondoms in the UK, according to research Warwick University and LSE, scrapping it could generate around ￡3.6bn for the Treasury.

Attention now turns to Westminster for Hunt’s budget set to be delivered around 12:30.

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Fiscal Drag

Hunt’s delivery comes as the tax burden on households and businesses stands at it its highest level in 70 years, with debt-to-GDP just shy of 100%. And for all the talk of tax breaks, the impact of Fiscal Drag has perhaps received less attention in the press with the Treasury freezing the thresholds which apply to paying income tax for the last few years.

Given the impact of inflation, which has stood at its highest level in decades, this has pushed a considerable amount of workers into tax paying – or higher tax paying – territory. According to Official forecasts, the impact of fiscal drag could increase the number of taxpayers by 4m by 2029 – as an additional 3m getting dragged into the higher rate of tax at 40%.

Through pushing people into paying tax or higher tax brackets, Fiscal Drag is expected to bring in an additional ￡45bn to the Treasury by 2029.

Gold Prices Rise to Record Highs

Gold prices rose to record levels yesterday exceeding the previous high of $2,141 per once set in December. The rally came as investors continued to weigh up the impact that softer-than-expected data out of the US would have on the Fed’s monetary loosening pathway. Money markets are now implying around a 55% chance of a 25bps rate cut at their policy meeting in June.?