The UK budget has few surprises but plenty of tax rises

There were few surprises left for the budget after such extensive briefing beforehand of what we should expect. The forecasts are a bit more pessimistic, and the government did need to raise considerable extra tax revenue to help pay for its substantial increases in public spending. They plan to spend £185 bn more next year than in 2023-24, the last full year of the previous government. The budget has added to the costs with the announcement of ending the two-child limit on additional benefits and some other smaller items. 

The 2024 budget put up taxes on employing people and on people with savings and investments. As a result, more people left the UK over the last year to seek a job or set up a business in a lower tax jurisdiction, or to take their current wealth to somewhere where they will keep more of it. Dubai, Italy and the US have been attractive places for people both with talent and with wealth. This budget mainly aims for more Income tax revenue in the later years of their forecast from continuing to freeze the tax thresholds. This means 780,000 more people will have to pay 20% tax, 920,000 more people will be pushed into the 40% tax band, and 4,000 more into the highest 45% band. 

The strict limitations now imposed on salary sacrifice will bring in £4.7 bn of extra National Insurance. Taxes on dividends, property and savings will go up by an additional 2%, raising an extra £2.1bn. There will be a £5.6bn bonus for the government next year by valuing up the student loan book, given the policy of easier terms for repayment leading to an OBR improved eventual repayment level. 

There will be a tax on driving an EV car at 3p per mile, a higher Council tax charge on homes over £2m in value following revaluations for Council tax purposes, an increased gambling tax for online betting, a reduction in writing down allowances for Corporation tax and less capital gains tax relief on employee ownership trusts.

The Office for Budget Responsibility sets out forecasts for the economy that determine how much the Chancellor needs to raise in taxes to keep the deficit under some control. They have downgraded their forecast of future productivity growth after years of overestimating it.

The government rightly wants to help create faster growth, as that brings in more tax revenues and cuts down on benefits for the unemployed. The bond market too wants faster growth to help bring down the deficit it has to finance. This budget is not helpful to growth with further tax rises on property, gambling and some processed foods with Income tax restricting real income growth in spending. The bond markets may be temporarily pacified by the fact the government sees the need to collect more revenue to pay for its higher spending and does not want to rely on more borrowing. It will however be concerned in case the same thing happens this year as last, leading to the need for even higher taxes in 2026. 

The government will continue to seek growth from more defence orders with a benefit for domestic armaments manufacture. It will continue to run down the oil and gas industry faster, ban all new diesel and petrol cars from 2030 leading to rapid factory closures in vehicle making, and will see further decline in petrochemicals, steel and other high energy using businesses. It will promote more investment in renewables and grid. The public accounts will see further and bigger steel, rail, Post Office and Bank of England losses to pay for. 

The UK economy has been performing well in business and financial services, legal and other professional advice, where exports have been growing strongly. These will continue to supply some offset to the bad news from industry and farming. The UK has been a ‘cheap’ equity market for some time, putting in a better performance this year as investors came to see some of the potential of the more successful companies. UK government bonds offer a better yield than other advanced countries, making them relatively attractive. Whilst the UK has budget deficit and spending issues, so do most of the other advanced countries. 

This budget will disappoint many small business owners, property owners and savers who wanted some relief from high taxes. It does enough to avoid a market meltdown, leaving investors free to examine the pockets of value that are apparent in little loved UK sectors. The government has a productivity problem to resolve and needs to rebuild confidence after the damage done by tax rises and fears of more tax rises. Its growth strategy rests heavily on capital investment led by the public sector, concentrated on energy and transport. The OBR forecasts reveal that they do not think the government will achieve its 1.5 m new homes target in five years, given the sluggish state of the property market for its first two years in office. The jury remains out on how the UK economy can grow at a faster rate and this Budget does not make the way forward any clearer.

About the author 

The Rt. Hon Sir John Redwood has been a long-standing member of the EPIC Investment Partners Advisory Board. 

John is a well known commentator on governments and economies, with long experience of investment markets. Trained as an analyst at Robert Flemings, he moved to N.M. Rothschilds where he became a Manager and Director of pension and charitable funds and Head of Equity Research. He was seconded to become Head of the Downing Street Policy unit before chairing a large, quoted UK industrial business. He served as an MP and a government Minister.  

In 2007 he set up Pan Asset with a colleague, an investment management business that pioneered active/passive funds and models in the UK. Following the sale of the business to Charles Stanley, a quoted investment manager in the City, he became their Global Chief Strategist advising on non-UK markets and economies. He also ran a demonstration fund for the FT, writing articles about it and illustrating the use that can be made of ETFs in portfolios. 

He is now an adviser to EPIC, providing insights into the big investment issues of the day from the debt and spending problems of the major governments to the green and digital revolutions which have so much impact on equity markets. He is a Distinguished Fellow of All Souls College, Oxford, where he helps with their Endowment investments and gives occasional lectures on modern economics and politics.