Fiscal constraints that governed Hunt's 2024 spring budget

The Chancellor of the Exchequer, Jeremy Hunt, presented the Budget speech on March 6, 2024. This year's budget was presented with the Chancellor facing limited "fiscal space" within certain self-imposed fiscal rules. The government's core fiscal rule states that debt should decrease as a percentage of national income within a rolling five-year period. Additionally, the fiscal rules mandate that the budget deficit should be at most three percent of GDP in the last year of the five-year forecast period. These rules also impose constraints on welfare spending. Fiscal rules help instill discipline in government finances to maintain sustainable debt levels. They also contribute to economic stability by creating a more predictable economic environment and enhancing the government's credibility.

The problems with the current UK fiscal policy in a financial downturn...

Inflexible fiscal rules are not always good. They can present challenges during economic downturns or global shocks when some flexibility may be needed to stimulate the economy. These rules can also lead the government to prioritise short-term fiscal targets over addressing long-term structural issues. Indeed, many experts recommend fiscal policies that prioritise improving the well-being of UK households rather than solely focusing on meeting fiscal rule targets. This spring 2024 budget was presented against the backdrop of recent economic forecasts from the Office for Budget Responsibility (OBR) showing a decline. Despite this, the Chancellor opted to reduce National Insurance Contributions rates in the budget.

Tax-raising measures contained in the Spring 2024 budget

Hunt's 2024 spring budget implemented measures to bolster tax revenues. Initiatives such as introducing excise duty on vaping products and ending the 'non-dom' status, which provided tax advantages to residents in Britain with foreign domicile for tax, demonstrate these efforts. The introduction of additional measures aimed at leveling up, such as increased funding and devolution deals, has been regarded positively. However, the magnitude of these funds is believed to be insufficient to close the gap between the highest-performing and lowest-performing areas fully.

For instance, infrastructure investments have primarily favoured wealthier regions. There's a pressing need for more focused investments in affordable transportation and housing to enhance welfare and stimulate economic growth in less prosperous areas. Also, the Chancellor must have a well-defined strategy for allocating funds to leveling-up projects to ensure effective utilisation.

2024:  tax as a percentage of GDP hits 37 percent

With tax revenues at their highest level in about 70 years, currently at 37 percent of GDP, there have been widespread calls for reducing the tax burden to stimulate economic growth.

27 million workers will benefit from the 2024 two percent cut in national insurance contributions

In response, the Chancellor unveiled a two-percentage-point cut in NICs. This move reduces the overall tax burden and is expected to benefit 27 million workers, saving the average worker approximately 450 annually. The OBR estimates that this reduction will lead to an annual loss of tax revenues amounting to 10.5 billion. Experts argue that this cut will disproportionately benefit higher earners than lower earners. They have also expressed concerns that this reduction may not substantially improve welfare or living standards, particularly for the poorest households, which still lag behind pre-pandemic levels.

Economists suggest increased spending on public investment to boost productivity and long-term potential output. They project that if the reduction in tax revenues from the NICs cut were redirected towards public investments, GDP could see a higher growth over the next five years. Also, the decrease in NICs will be outweighed by future tax increases resulting from freezing income tax thresholds. This measure is needed to ensure compliance with the existing fiscal rules.

Public investment as a percentage of GDP is falling 

An important concern the Chancellor did not address is the falling share of public investment in GDP in the coming years. The UK's expectation for long-term growth rates remains weak, highlighting the need to increase public investment to boost growth and improve productivity. There has been a clear decline in the quality of public services across various sectors, particularly in the treatment backlogs within the NHS. Generally, public investment tends to have a more pronounced impact on promoting growth than tax cuts and short-term spending measures. Many economists also noted that the Chancellor could have raised income tax thresholds. Such a change would help poor households more than the National Insurance cut.