Budget Day: What To Expect (And How It Might Affect You)

UK Budget

The last UK budget before the UK general election will be delivered by Chancellor Jeremy Hunt on Wednesday.

One thing seems certain. Hunt will cut taxes. Things to look out for when the Spring Budget is announced include: –

• Tax cuts. With the Sunak government trailing Labour by as much as 20% in the polls with an election that needs to be held by January 2025, tax cuts seem ‘guaranteed’. Will Hunt continue to focus on National Insurance (NI) rather than cutting income tax following the 2p cut to NI he announced last Autumn.
• Fuel Duty. The other near certainty is that Hunt will extend the fuel duty freeze. Fuel duty has been frozen for 13 consecutive years and there is zero indication this will change.
• Vaping tax. Vapes are already subject to VAT but do not currently face a separate levy like tobacco does.
• Non-domiciles. The Chancellor is reportedly considering scrapping or scaling back the tax perks enjoyed by foreign nationals who are resident in the UK. The Office for National Statistics (ONS) figures there are just under 70,000 non-domiciles in the UK, including of course Prime Minister Rishi Sunak’s wife.
• Productivity. One way of freeing up the space for tax cuts is reducing public sector spending. Public sector productivity has flatlined since 2000 but Hunt is hopeful that Artificial Intelligence (AI) could deliver the kind of productivity gains that previous Chancellors could only ever dream of.
• ISAs. Could Hunt announce a shake up the Lifetime Individual Savings Account (ISA) limit in an attempt to get more people onto the property ladder. The lifetime ISA limit has not been raised since 2017.
• 99% mortgages may also be introduced to give cash-strapped first-time buyers a better chance of getting onto the housing ladder.

Currency Exchange Rates Update

Ahead of the budget, the Pound rose to hit its highest level against the Euro on the 14^th of February since last August before finishing the month nearly 0.7% down from this peak. The Pound is still 1.30% up on the Euro in 2024 as the currency markets price in slower interest rate cuts by the Bank of England (BoE) than were expected at the start of this year. The currency markets now expect the BoE to cut interest rates after the European Central Bank (ECB) and this alone should underpin the value of the Pound.

Like with the Euro, against the US Dollar the Pound started February at the top end of its trading range since last August before falling by nearly 0.9% at month end with some in the currency markets now forecasting a surge in the value of the Dollar after Apollo Global Management, a major American money manager forecast that the US Federal Reserve (Fed) won’t cut interest rates at all in 2024. The currency markets started 2024 expecting as many as six interest rate cuts by the Fed. Apollo is a New York-listed financial services firm with half a trillion dollars under management.

The Australian Dollar was the second-worst performing G10 major currency in February after the monthly inflation data came in lower than expected and the Reserve Bank of New Zealand (RBNZ) kept interest rates unchanged at their latest policy meeting, which has spillover implications for the Reserve Bank of Australia (RBA).

What’s In The News?

In The UK…

Prime Minister Rishi Sunak warned in a speech outside No 10 last Friday evening that extremists are trying to undermine British democracy as he called for the country to unite to stamp out divisive politics. This followed George Galloway’s win in the Rochdale by-election with the alleged aid of 80% postal votes.

Good News

Pre-budget, the currency markets are optimistic for the UK economy suggesting the recession is ‘already over’ as economic activity picks up again. Figures out last month showed the UK slipped into a shallow recession in the second half of last year. However, a closely watched survey suggests the UK is already powering away from this shallow recession as business activity picked up again in February with private sector output rising to its highest level in nine months in February.

The figures showed the UK’s all-important service sector continued its strong run, remaining at 54.3 while the manufacturing sector saw a slight improvement to 47.1, up from 47 previously. A figure above 50 equals expansion.

Across the economy as a whole, new business volumes increased for the third month in a row. Firms in the service sector also saw a “marked upturn” in new work from abroad.

The BoE home finance approvals data has risen from 51,500 in December to 55,200 in January.

The Nationwide’s reported UK house prices grew for year-on-year for the first time since January 2023.

The Lloyds Business Barometer February survey also continues to paint a positive picture for the UK economic outlook. Although the overall confidence measure dipped to 42% from 44%, it still matched the 2023 high and remains well above the long-term average of 28%. That signals a positive outlook for future output and adds to expectations that last year’s technical recession was short-lived. In addition, the report revealed that staffing level expectations are the highest for nearly two years.

The Schroders Global Cities index showed London is now ranked second after falling to third last year.

The index ranks cities based on economic, environmental, innovation and transportation factors, aims to identify the top cities in the world for business.

San Francisco took the number one spot for the second year in a row, thanks to its dominant start-up and venture capital ecosystem, spurred by a new wave of AI investment. Manchester was the only other British city to rank in the top 30, supported by high environmental score due to a cooler climate and low exposure to natural hazards, combined with strong net zero policies that feature specified emission reduction targets.

Not So Good News

Last month’s GDP figures for the fourth quarter of 2023 showed that the UK slipped into a shallow recession in the second half of last year.

According to the ONS the UK’s public sector net debt was 96.5% of GDP at the end of February. That’s the highest level seen since 1963/64. Back then, debt-to-GDP was firmly on the way down, having peaked just after World War Two at more than 250%.

By contrast, in the early 1990s, debt-to-GDP fell as low as 22%, before spending a decade or so around 30% to 35%. It was the 2008 financial crisis that delivered the first big blow to the national balance sheet, and we spent most of the 2010s with debt-to-GDP around 80%. Then came the pandemic and lockdowns of 2020 followed shortly after by an energy crisis. Hence today’s ugly debt picture.

According to the Institute of Fiscal Studies (IFS) we’re labouring under the highest tax burden in a generation and by the end of the 2028/29 financial year, the UK’s tax take is expected to hit 37.7% of GDP, which would be the highest level since 1948. 

According to the Treasury watchdog, eight major banks (Barclays, HSBC, TSB, Lloyds, Santander, NatWest, Metro Bank and Handelsbanken) closed just under 142,000 UK small business accounts last year as MPs raise questions over lenders reasons for debanking small business customers. Common reasons given by the banks for the account closures included risk appetite, a lack of information sharing and financial crime concerns.

In The USA…

Economists at Goldman Sachs have pushed back their view on when the Fed will begin cutting interest rates to June.

The US Congress has passed a stop-gap measure that avoids a partial government shutdown and gives them another week to agree a comprehensive bill.

Durable goods orders fell 6.1% in February, far exceeding the 4.5% consensus forecast and marking the most substantial monthly decline in durable goods orders since April 2020.

US new home sales rose less than expected despite a batch of downward revisions in earlier months but the S&P CoreLogic Case-Shiller 20-city home price index in the US went up 6.1% y/y in December 2023, the most since November 2022.

An important Fed inflation measure rose by 0.4% in January as expected, up 2.8% from a year ago whilst inflation rose in line with expectations in January.

In The EU…

Inflation in the 20-nation euro zone fell to 2.6% in February.

The latest economic sentiment indicator in the Eurozone declined to 95.4 in February 2024, down from January’s revised figure of 96.1 and falling short of market expectations. Confidence deteriorated among manufacturers, service providers, retailers, and constructors.

According to the GfK Consumer Climate Indicator, German consumer morale improved slightly heading into March from February’s 11-month low. However, the headline index has remained below its long-term average for a record of 28 consecutive prints – the longest pessimistic streak.

German GDP figures fell by 0.3% in the fourth quarter of 2023.

German business sentiment index (IFO) fell to 85.5, consistent with data showing a substantial slowdown in their economy.

The latest PMI data from Germany saw a much worse-than-expected Manufacturing print. The reading of 42.3 was far worse than the 46.1 eyed and its worst reading since November 2023. This PMI reading backs up recent comments from the Bundesbank that the Eurozone’s biggest economy is likely to see its recession continue into the first quarter of 2024.  

Germany is slashing its expectations for gross domestic product (GDP) growth for 2024 to just 0.2%, down from the 1.3% previously estimated.

Others…

China’s largest private property developer has been hit with a winding-up petition as the country’s real estate crisis deepens. Country Garden racked up more than £150bn in debt in a property bubble that economists say has burst as demand from buyers dries up. The petition, filed by a lender demanding payment of approximately 1.6bn Hong Kong dollars (£161m), came weeks after the city’s high court granted a similar petition against peer Evergrande, which is more than $300bn (£237bn) in debt.

Last week, ratings agency Moody’s suddenly removed credit ratings for 10 Chinese developers.

A huge trove of documents appeared to outline in extraordinary detail the scope of China’s state-sponsored cyberattacks on foreign governments. The documents, which industry experts believe to be authentic, appeared to reveal successful attacks on a series of high-value government targets in 2021 and 2022, ranging from the UK foreign office to the Royal Thai Army and even NATO Secretary General Jens Stoltenberg.

Leaked Russian military files reveal criteria for nuclear strike. Vladimir Putin’s forces have rehearsed using tactical nuclear weapons at an early stage of conflict with a major world power, according to leaked Russian military files that include training scenarios for an invasion by China. The classified papers describe a threshold for using tactical nuclear weapons that is lower than Russia has ever publicly admitted, according to experts who reviewed and verified the documents.

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Quote

This week’s quote comes from Thomas Sowell

“I have never understood why it is ‘greed’ to want to keep the money you have earned but not greed to want to take somebody else’s money.”