Tag: Budget

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UK Government finances in surplus but…

UK finances

The UK government has announced a significant budget surplus for January 2025, marking a notable achievement in its fiscal management

The surplus, which is the difference between what the government spends and the tax it takes in, amounted to £15.4 billion. This figure represents the highest level for the month of January since records began over three decades ago.

However, despite this impressive surplus, the figure fell short of the Office for Budget Responsibility’s (OBR) forecast of £20.5 billion. The shortfall has increased pressure on Chancellor Rachel Reeves to meet her self-imposed fiscal rules.

The OBR, which monitors the government’s spending plans and performance, will release its latest outlook for the UK economy and public finances on 26 March 2025.

The surplus was driven by a surge in tax receipts, particularly from self-assessed taxes, which are typically higher in January compared to other months. However, the lower-than-expected tax receipts suggest underlying weaknesses in the UK economy.

The Office for National Statistics (ONS) reported that borrowing in the financial year to January 2025 was £118.2 billion, which is £11.6 billion more than at the same point last year.

The government now faces the challenge of balancing its fiscal rules with the need to support economic growth. Weak economic growth and higher borrowing costs have reduced the headroom available to the Chancellor, making it more difficult to meet her fiscal targets.

Economists have suggested that Reeves may need to consider raising taxes or cutting public spending to stay within her fiscal rules.

As the UK economy continues to navigate these challenges, the government’s ability to manage its finances effectively will be crucial in maintaining credibility with financial markets and ensuring long-term economic stability.

The upcoming Spring Forecast will be a critical moment for the UK Chancellor to outline her plans and address the fiscal challenges ahead

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Has ‘Rachel from accounts’ messed up the UK economy?

UK budget

The pound has continued to fall after UK government borrowing costs rose and concerns grew about public finances

Sterling dropped as UK 10-year borrowing costs surged to their highest level since the 2008 financial crisis when bank borrowing virtually ground to a halt.

Economists have warned the rising costs could lead to further tax rises or cuts to spending plans as the government tries to meet its self-imposed borrowing target.

The UK government creates its own financial crisis as it messes up its ‘go for growth’ policy

The UK economy is currently grappling with a series of financial challenges that have led to a significant fall in the value of the pound, soaring treasury yields, and high borrowing costs.

These developments have been largely influenced by the recent budget announced by Chancellor Rachel Reeves, which has sparked concerns among investors and economists alike.

Downward trajectory

The pound has been on a downward trajectory, recently hitting its lowest level since November 2023. Traders are betting on further declines, with some predicting the pound could fall as low as $1.12

This decline is partly due to the rising cost of government borrowing, which has surged to levels not seen since the 2008 financial crisis. The yield on 10-year gilts has climbed to 4.8%, while the yield on 30-year gilts has reached 5.34%, the highest in 27 years.

Recent UK budget

The recent budget has played a crucial role in these developments. Announced in October 2024, the budget included significant tax hikes and increased spending, leading to a substantial rise in government borrowing.

The budget deficit is expected to reach 4.5% of GDP this fiscal year, pushing the overall government debt close to 100% of GDP. This increase in borrowing has led to a higher supply of government debt, which in turn has driven down the price of bonds and pushed up yields.

Higher yields

Higher yields mean that the government has to pay more to borrow money, which has significant implications for its fiscal policy. The rising cost of servicing government debt could force the government to either raise taxes further or cut spending to meet its fiscal rules.

This situation is reminiscent of the market turmoil following Liz Truss’s mini budget in 2022, which also led to a sharp rise in borrowing costs and a fall in the value of the pound.

The impact of these developments extends beyond the government. Higher borrowing costs are likely to affect households and businesses as well.

Economic growth at risk

Mortgage rates, which are influenced by government bond yields, are expected to remain high, putting additional pressure on homeowners. Businesses, on the other hand, may face higher costs of borrowing, which could lead to reduced investment and slower economic growth.

The UK is facing a challenging economic environment characterized by a falling pound, high treasury yields, and rising borrowing costs.

The recent budget has exacerbated these issues, leading to increased government borrowing and higher debt levels. As the government navigates these challenges, it will need to carefully balance its fiscal policies to avoid further economic instability and ensure sustainable growth and not more ‘unfunded’ debt.

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UK economy had zero growth between July and September 2024 – bad to worse

UK economic data

Revised official figures indicate that the UK economy was weaker than initially estimated between July and September 2024. The economy experienced zero growth in these three months, down from an earlier estimate of 0.1%.

UK Chancellor, Rachel Reeves reportedly stated that the challenge to fix the economy “after 15 years of neglect is huge,” and October’s Budget would “deliver sustainable long-term growth, putting more money in people’s pockets.”

However, one of the UK’s leading business groups, the CBI, said its latest company survey suggested “the economy is headed for the worst of all worlds.”

The downward revisions will be a setback for Labour, which has prioritised boosting economic growth. It has promised to deliver the highest sustained economic growth in the G7 group of wealthy nations.

Separate figures released last week showed that inflation, the rate at which prices increase over time, is rising again at its fastest pace since March 2024. But it is close to the Bank of England target of 2%

The Bank of England voted to hold interest rates at the last meeting, stating that it believed the UK economy had performed worse than expected, with no growth between October and December 2024.

Businesses have warned that measures announced in October’s Budget, including a rise in employer national insurance and a higher minimum wage, could force them to raise prices and reduce the number new jobs.

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UK economy shrinks unexpectedly for second month in a row contracting 0.1% in October 2024

The U.K. economy contracted unexpectedly in October 2024, according to data from the Office for National Statistics (ONS).

Gross Domestic Product (GDP) fell by an estimated 0.1% on a monthly basis, the ONS said Friday 13th December 2024, attributing the downturn to a decline in production output. 

It marked the second consecutive economic downturn, following a 0.1% GDP decline in September 2024. Sterling declined on the back of these disappointing figures, trading 0.3% lower against the U.S. dollar in early trade.

However, ‘real’ GDP is estimated to have grown 0.1% in the three months to October 2024, the ONS said, compared to the previous three months ending in July 2024.

In a statement on Friday 13th December 2024, U.K. Finance Minister Rachel Reeves reportedly conceded that the October figures were ‘disappointing,’ but defended the government’s economic strategies. I expect the chancellor would have been quick to own the success had the GDP improved – especially after the ‘for growth’ budget.

The economy has grown just once over the past five months and is 0.1% lower than before Labour won the election. That may suggest it’s not just the Budget that is holding the economy back. Instead, the drag from higher interest rates may be lasting longer than was calculated.

Either way, be it budget or inflation pressure – the UK economy isn’t growing.

UK GDP January 2022 – October 2024

Note: preliminary ONS figures may be revised in future assessments

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UK business confidence falls to lowest level in almost two years after Labour budget

In November 2024, business confidence in the U.K. dropped to its lowest point since January 2023, as reported by BDO, a business advisory and accountancy firm.

Concurrently, KPMG noted that UK job vacancies decreased at the quickest pace since the pandemic began. This downturn coincides with warnings from businesses that the Labour Party’s ‘pro-growth’ budget could exacerbate inflation and decelerate hiring.

Tax increases do not fit well with a ‘pro-growth’ agenda. Also, GDP predictions made by the UK chancellor for 2025 through 2027 are lame.

The Labour budget has notably affected U.K. business confidence for a variety of critical reasons:

  • Tax Increases: The budget introduced a substantial hike in National Insurance contributions for employers, raising the rate to 15% on salaries above £5,000. This increase has led to concerns about higher operational costs, which many businesses fear will result in job cuts and reduced investment.
  • Minimum Wage Hike: The budget also included an inflation-busting increase in the minimum wage. While this aims to improve living standards, it has added financial pressure on businesses, particularly those in sectors with tight margins like retail and hospitality.
  • Economic Uncertainty: The combination of these measures has created a sense of economic uncertainty. Businesses are worried about their ability to absorb these additional costs, leading to a decline in overall optimism.
  • Investment Concerns: The increased costs have forced many businesses to reconsider their investment plans. Some have already announced cuts to expansion projects and other growth initiatives.
  • Next Increase: in public workers pay looms nigh.

These factors have collectively contributed to a significant drop in business confidence, with many firms bracing for a challenging economic environment ahead

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UK growth slows – it’s the ‘budget’ stupid!

Low UK growth figures

The UK economy expanded by just 0.1% from July to September 2024, as announced in the most recent official data release.

The growth was less than anticipated, and the Office for National Statistics (ONS) reported that most sectors experienced subdued activity over the quarter.

Labour, having prioritised economic growth upon assuming power, found Chancellor Rachel Reeves expressing dissatisfaction with these figures, which represent the initial three months of the new administration.

Several economists have attributed the uncertainty surrounding the contents of October’s Budget as a factor impeding growth.

This impact was notably pronounced in September, when the economy saw a contraction of 0.1%.

Moreover, the government is contending with criticism from certain businesses that are opposed to the tax increases introduced in the Budget.

Whichever way you look at these figures; they’re utterly dire.

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There is a UK budget coming and the new chancellor reportedly needs to raise £20 billion – to fill a ‘black hole’ – how can this be done without upsetting the electorate?

Tax black hole

Tax Reforms

Increase in VAT: Adjusting the Value Added Tax (VAT) rate could generate substantial revenue.

Pension Tax Relief: Limiting pension tax relief to the basic rate of income tax could raise around £15 billion per year. Pension tax relief raid.

Windfall Tax: Increasing the windfall tax on the profits of oil and gas companies could also contribute significantly.

General Tax Increases: N.I., Income Tax, Capital Gains Tax, Inheritance Tax,

Public Sector Efficiency

Improving Productivity: Enhancing public sector productivity by just 5% could deliver up to £20 billion in benefits annually.

New Taxes or Levies

Green Taxes: Introducing or increasing taxes on carbon emissions and other environmental levies could help raise funds while promoting sustainability.

Digital Services Tax: Expanding the scope of the digital services tax to cover more online businesses could also be a potential revenue source.

Electric vehicle tax: new tax bands for electric cars

Spending Cuts

Reducing Public Expenditure: Identifying and cutting down on non-essential public spending could help balance the budget.

Economic Growth

Stimulating Growth: Policies aimed at boosting economic growth, such as investing in infrastructure and innovation, could increase tax revenues indirectly by expanding the tax base. But this will take time to fully materialise.

Each of these measures comes with its own set of challenges and implications, so the government would need to carefully consider the economic and social impacts before implementation.

Black hole?

The Chancellor has recently pointed to a ‘black hole’ in the public finances, referencing the recent uncovering of an ‘unbudgeted’ £22bn overspend in the current tax year following her tenure commencement at No. 11 Downing Street in July.

The reality of this newfound deficit is subject to debate. However, given that the Chancellor has ruled out the possibility of borrowing for day-to-day expenses, it seems she very likely she might be compelled to raise taxes to offset these expenditures.

N.I. and Pension raid?

In its last year, the Conservative government cut taxes by £20 billion by reducing the National Insurance rate. Reversing this cut would be a direct way to increase revenue, taking us back to the financial situation before last November.

Currently, many people receive a 40% tax relief on pension contributions but are taxed at 20% when they withdraw. This ‘inconsistency’ could easily become a target for the Chancellor.

Additionally, employers’ National Insurance contributions are not applied to pension contributions or withdrawals, and individuals can even take a tax-free lump sum from their pension after having received tax relief on their contributions.

Understanding the complexities is not necessary to see that a chancellor in search of extra tax revenue may consider pension contributions as a significant source of additional income.

The UK budget is due on: 30th October 2024 – let’s see just by how much UK taxes are increased – because they will be.

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UK posts record budget surplus in January 2024

Red brief case

The U.K. logged a record £16.7 billion net budget surplus in January 2024, according to official figures released on Wednesday 21st February 2024

The Office for National Statistics noted that the country’s public finances usually run a surplus in January, unlike during other months, as receipts from annual self-assessment tax returns come in.

Combined self-assessment income and capital gains tax receipts totaled £33 billion in January, the ONS noted, down £1.8 billion from the same period of last year.

Total government tax receipts came in at a record £90.8 billion, up £2.9 billion compared to January 2023.

Government borrowing during the financial year spanning to the end of January 2024 was £96.6 billion, £3.1 billion lower than over the same 10-month period a year ago and £9.2 billion lower than the £105.8 billion previously forecast by the independent Office for Budget Responsibility.

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UK autumn statement, in a nutshell

UK autumn statement

Some of the main takeaways from the chancellor’s autumn statement November 2023

National Insurance rate cut from 12% to 10% from 6 January, affecting 27 million people.

The 75% business rates discount for retail, hospitality and leisure firms in England extended for another year.

Class 2 National Insurance – paid by self-employed people earning more than £12,570 – abolished from April.

Class 4 National Insurance for self-employed – paid on profits between £12,570 and £50,270 – cut from 9% to 8% from April.

Full tax break permitting companies to deduct spending on new machinery and equipment from profits – now made permanent.

Funding of £4.5bn to attract investment to strategic manufacturing sectors, including aerospace, green energy, aerospace, life sciences and zero-emission vehicles.

Some £500m over the next two years to fund artificial intelligence (AI) innovation centres.

New premium planning services for England, with faster decision times for major business applications and fee refunds when these are not met.

Defence spending to remain at 2% of national income – a Nato commitment.

Overseas aid spending kept at 0.5% of national income, below the official 0.7% target.

Reaffirms previous commitments made last autumn to provide £14.1bn for the NHS and adult social care in England, as well as an extra £2bn for schools, in both 2023‑24 and 2024-25.

All alcohol duty frozen until 1 August next year.

Tobacco products duty increases by 2% above RPI inflation; hand-rolling tobacco rises 12% above RPI.

Fuel duty remains 52.95p per litre for petrol and diesel, after the chancellor announced a 5p per litre cut for 12 months in March 2023

State pension payments to increase by 8.5% from April, in line with average earnings.

Claimants in England and Wales deemed able to work who refuse to seek employment to lose access to their benefits and extras like free prescriptions.

UK autumn statement – art illustration of office worker preparing data

Further £1.3bn to help people who have been unemployed for over a year.

National Living Wage – to increase from £10.42 to £11.44 an hour from April.

Funding of £1.3bn over the next five years to help people with health conditions find jobs.

OBR Stats

Independent Office for Budget Responsibility (OBR) expects the economy to grow by 0.6% this year and 0.7% next year, rising to 1.4% in 2025; then 1.9% in 2026; 2% in 2027 and 1.7% in 2028.

Living standards not expected to return to pre-pandemic levels until 2027-28.

Underlying debt forecast to be 91.6% of GDP next year; 92.7% in 2024-25; 93.2% in 2026-27; before declining to 92.8% in 2028-29. (One to watch)

OBR forecasts that inflation – the rate prices are rising – will fall to 2.8% by the end of 2024, before reaching the Bank of England’s 2% target rate in 2025. (One to watch)

The OBR says higher inflation means real value of departmental budgets will be £19bn lower by 2027/28 compared with March 2023 forecasts.

Borrowing forecast to fall from 4.5% of GDP in 2023-24; to 3% in 2024-25; 2.7% in 2025-26; 2.3% in 2026-27; 1.6% in 2027-28 and 1.1% in 2028-29. (One to watch)