In our email last week, we discussed the challenges faced by Chancellor Jeremy Hunt ahead of his Spring Budget. As expected, in the lead up to the much-anticipated speech, news was rife with rumours and speculations about what “rabbit” the chancellor may decide to pull out of his bag, or rather his red ministerial box.
On Wednesday, grappling with the dual challenges of constrained public finances and the expectation to offer some pre-election benefits, Hunt took to the dispatch box in Westminster. The centrepiece of the Chancellor’s speech was the announcement of a 2% cut to National Insurance, ignoring calls from some Conservative MPs to slash income tax instead. Hunt went on to state that this cut, combined with that announced last November, will benefit the average worker by around £900 a year.
While Hunt might remain hopeful that this cut will be enough to close the opinion poll deficit with Labour, many Conservative MPs fear that a 2% cut in National Insurance—a tax less well understood by many voters—might not resonate as a significant benefit. Despite their pleas for the Chancellor to pursue the more headline-grabbing decision to cut income taxes, benefitting more voters, a reduction in National Insurance is all the Tory government could afford.
For the government, lowering National Insurance contributions over cutting income taxes was the more budget-friendly option as it focuses on earned income. In other words, it is cheaper as it applies to fewer people, only affecting those currently in the workforce. Notably, retirees will not see any difference with this change as they do not pay National Insurance. Likewise, individuals who get their income from sources like savings, investments, or property will not be impacted by this policy tweak.
However, even a cut to National insurance will come at a cost. To facilitate this the Chancellor increased duties on tobacco products, introduced duties on vaping products and raised taxes on non-economy flights. Hunt went on to scrap tax breaks for owners of holiday lets and announced the abolition of stamp duty relief for those purchasing more than one dwelling. Additionally, he stated that windfall tax on oil and gas companies will be extended until 2029, which he expects will raise £1.5billion. However, the most significant move by the Chancellor to raise funds, was the scrapping of the non-domiciled tax status which allowed foreign nationals to live and work in the UK for 15 years without having to pay UK tax on their earnings on capital held abroad. This regime will start from April 2025 and the Chancellor expects it to raise £2.7bn in taxes. Despite speculation that public spending would be cut the chancellor managed to keep it at a 1% increase in day-to-day public spending above inflation, while stating military spending will increase as soon as economic conditions allow.
Fears that the reduction of National Insurance could increase consumer spending and potentially fuel inflation, leading to interest rates staying higher for longer, were laid to rest early in the Chancellor's speech. He insisted that the Tory party, under Rishi Sunak, is successfully bringing down inflation. To support these claims, he referenced reports from the Office for Budget Responsibility (OBR), stating that inflation is expected to fall below the 2% target within the next two months—nearly a whole year earlier than previously forecasted at the Autumn statement last November. The Chancellor went on to announce a freeze on fuel duties for a further 12 months, a move likely to further help ease UK headline inflation.
Following the announcements, markets seemed pretty accommodating. The FTSE 250 was boosted as UK-listed mid-caps saw strong gains with the FTSE 250 rising 1.1% higher shortly after the Chancellors announcement of the introduction of a British ISA, to encourage investment in the UK. This tax wrapper will have all the advantages of other ISAs while allowing for an additional £5,000 annual investments in UK equities. These movements benefitted our investment team who recently increased their allocation to UK-listed small and mid-caps ahead of this.
Jeremy Hunt opted for water rather than a traditional alcoholic beverage for his speech and similarly, given the limp announcements, taxpayers might not quite feel the need to pop the champagne. However, we are now getting towards the sharp end of a UK election, and I am sure much more enticing offers will be made to the public to garner their support than those the Chancellor was limited to yesterday.
Do have a good weekend.