Fiscal Policy

Budget breakdown

Good morning from New Economy Brief. 

So, that’s it. The last fiscal event before the general election (probably…). Given that this week saw the Conservatives’ estimated vote share slump to a record low, all eyes were on Jeremy Hunt to see what rabbits he might pull from his red box in a bid to claw back support. But given that the Government’s major announcement – a 2p cut to National Insurance Contributions (NICs) – was already widely briefed ahead of the Budget, the Chancellor’s statement to the house was broadly in keeping with expectations. 

The result is what the Chancellor calls a “Budget for Long-Term Growth”, and others less favourably describe as a “cut and run” Budget. In other words, cut tax rates now and hope for electoral success, then run, leaving future administrations with less money for public services. This week, we explore the detail, politics and implications of the Spring Budget.

Cut taxes, gain votes? The Chancellor’s big policy, the “worst-kept fiscal secret in Westminster”, was to cut NICs from 10% to 8% from April, on top of another 2p cut that was announced in the Autumn Statement and introduced at the start of this year. But this might not be the big vote winner the government is hoping for. According to polling by Stop the Squeeze, less than 8% of voters have even noticed any difference in their finances from of January’s NICs cut, and clearly it did not lead to a turnaround in the polls for the Conservatives. Will it be different this time? Probably not. According to the New Economics Foundation, the richest households will gain 12 times more from this latest NICs cut than those on the lowest incomes. Furthermore, households in London and the south-east stand to gain far more than those in other regions, with Londoners likely to gain over £400 more annually than those in the north-east – not great for winning back that Red Wall. A snap poll by Savanta finds that 74% think the Budget isn’t enough to help them with the rising cost of living. Ouch.

  • Paying for it. The cost of the cut will be partially offset by the abolition of the ‘non-dom’ tax status and other tax increases. The first of these (originally a Labour policy), will generate an estimated £2.7 billion annually by making UK residents who have their permanent “domicile” abroad start to pay UK tax on overseas income or investment gains. Also rising are taxes on vapes (from 2026), tobacco and non-economy class flights. Tax breaks for owners of holiday lettings will be scrapped and the windfall levy on oil and gas producers will be extended another year to 2029.
  • What else? Other policies worth mentioning are an increase to the threshold at which child benefit is tapered from £50,000 to £60,000 and the introduction of a British ISA where individuals can save an additional £5,000, invested only in UK companies, on top of the existing £20,000 ISA allowance. 
  • Support for those on the lowest incomes. Poverty campaigners have welcomed certain measures in the Budget such as the abolition of the £90 Debt Relief Order fee and a six month extension of the household support fund. But there was no mention of bringing back the cost of living payments that ended last month. And many argue that the Budget did little for those on the lowest incomes given that the main spending pledge of a NICs cut disproportionately benefits the wealthiest

Gaming the rules. The run-up to the Budget was dominated by speculation about how much ‘headroom’ the government would have within its fiscal rules and whether the Chancellor would launch another raid on future public spending to fund tax cuts. The reality is that the government ended up meeting their fiscal rules by a slender margin of just £8.9bn, with the Office for Budget Responsibility (OBR) repeatedly warning that this number depends on the government raising taxes such as fuel duty, which they have so far been reluctant to do.

  • The big squeeze. But the OBR reserves its sternest warnings for the government's plans on future public spending. While Hunt did not revisit future public spending totals, the OBR points out that his plans imply real-terms cuts of between 2.3% and 3.6% for unprotected departments (depending on whether the government fulfils its stated ambitions on defence spending). Given that “performance indicators for public services continue to show signs of strain”, the OBR warns that “delivering a 2.3 per cent a year real terms fall in day-to-day spending would present challenges.” Which is about as close as they can come to saying the plans are unrealistic. IPPR’s George Dibb also flags that the government has pencilled in a further large drop in public investment.
  • More with less. The government’s answer is that public spending can be made more efficient if there are productivity gains in the public sector – it promises a small pot of money for IT improvements which it claims will deliver huge long-term savings in the NHS. But it is not the NHS budget which is set to be cut under future spending scenarios, so it is unclear how these productivity gains could let other departments deliver the same services with less money.
  • A leap in the dark. It is important to emphasise, as we did for the last fiscal event, just how completely the government's tax cuts depend on squeezing spending later. These cuts are the foundation of the whole government economic narrative. It is even more extraordinary, then, that the government has confirmed that there will not be another spending review before the election. This means we will get no more detail on these spending plans and what they might mean for services, and leaves departments (whose budgets expire in March next year) unable to plan for the future.
  • Rule breakers? One achievement of this fiscal strategy has been to unite wonks across the political spectrum in condemnation of the UK’s tax and spend regime. While there is certainly still disagreement on the ideal policy mix, it is now extremely difficult to find anyone who will defend the current set of fiscal rules. Which makes it even more extraordinary that they continue to fundamentally shape economic policy-making.


A surprising direction? There may not have been any policy ‘rabbits’ in the Budget, but the Chancellor’s speech did contain a number of surprising arguments which are worth exploring (even if they weren’t necessarily backed up with policy). First the Chancellor explicitly made the case that short-term public capital investment could deliver long-term fiscal benefits (in the context of the NHS productivity plan). This is a departure from the government’s revealed preference for cutting public investment. Perhaps more interesting was his argument that the unequal taxation of work and investment income is “unfair”. This is what tax campaigners have been arguing for many years in calling for changes  like bringing capital gains tax into line with income tax. The Chancellor may have used this argument to justify a NICs cut, but it may open the door for others to propose more revenue raisers by increasing taxes on ‘unearned’ income.

What’s next? Jeremy Hunt ended his budget speech by floating an ‘ambition’ to abolish NICs entirely, perhaps foreshadowing any further fiscal statement we might get before the election or even the Conservative manifesto. But given that doing this would cost around £46bn (more than twice as much as Labour’s original Green Prosperity Plan, which the government described as unaffordable Hunt himself labelled a “splurge” that would “push up inflation, push up interest rates, and make mortgages more expensive”), it seems likely to remain an ‘ambition’ rather than a concrete policy pledge. As the election’s timing is still uncertain, we are still in the dark about whether there is another fiscal event to look forward to before we get there. As for Labour, the government’s theft of their non-dom policy will necessitate some thinking about how to replace the revenue. Ultimately, the Budget does nothing to dispel the impression that the real questions about UK economic policy are on hold until after the election, and that little of what the Chancellor has announced will affect either the economy or the polls. As the FT’s Robert Shrimsley put it, this is “an expensive way to not shift the political dial”.

Weekly Updates

Monetary policy

The legacy of quantitative easing. The New Statesman’s Will Dunn explores the rise of quantitative easing (QE) over the past two decades and how it can be blamed for everything from “social media and Big Tech, the property boom, the gig economy, Elon Musk, cryptocurrencies, fake news, overpriced coffee, Brexit, woke capitalism, Donald Trump and yes, perhaps even Prince Harry and Meghan Markle”. Dunn also explores the implications for wealth inequality, highlighting Bank of England research showing that in just three years, QE “inflated the wealth of the top 10 per cent in Britain by up to £322,000 per household”. 

  • The Bank of England’s fiscal powers. Economist Daniela Gabor explores how the “invisible hand” of the Bank of England (BoE) “is now depleting the Treasury coffers to boost commercial bank profits”. Gabor explains how the BoE’s Asset Purchase Facility (APF), the institutional mechanism for quantitative easing, will cost the Treasury up to £230 billion by 2033. 

Interest rates and the wealthy. BoE Monetary Policy Committee member Catherine Mann has said that higher interest rates are failing to curb inflation due to the spending habits of wealthy people. Mann explained that price rises are increasingly driven by those who are immune to higher interest rates - such as those without mortgages - who still have plenty of disposable income for things like travel, eating out and entertainment.


Housebuilding. The Competition and Markets Authority (CMA) has published the final report of its investigation into housebuilding. In this thread, Future Economy Scotland’s Laurie Macfarlane explains how the UK’s speculative model of development, where developers are incentivised to ‘drip feed’ homes onto the market rather than to meet full demand, is a key reason for the under delivery of new homes identified in the CMA’s report.


Growth as an ideology. Political economist Craig Berry explores in a two-part blog post how “the pursuit of growth as a first-order policy priority is misguided”, as this can ironically lead to deprioritising policies that would boost growth in the long term. In the second blog post, Berry examines the “ideological implications” of preserving “key aspects of a stagnant economy”.

Fiscal policy

Gaming the rules. As we explored in this week’s Focus, governments make up their own fiscal rules, and also have a tendency to break them - or at least game them. In a new report The Institute for Government argues that this fiscal framework is “incentivising bad policy decisions” and advocates for a number of measures to promote longer term thinking such as a single fiscal event per year, a regular cycle of spending reviews, binding objectives to the third year of the forecast (rather than the fifth) and giving the Office for Budget Responsibility the flexibility to assess whether government policy is consistent with meeting the government’s overarching fiscal objectives, rather than just the letter of specific rules.