Jeremy Hunt, Chancellor of the Exchequer, delivered the Spring Budget on Wednesday 6 March, the final before a general election. Academics from across City reacted to his plans.
Budget reactions
Professor Les Mayhew, Professor of Statistics at Bayes Business School, felt Hunt's Budget prioritised short-term reform over long-term reform. He said:
Overall, the budget prioritised putting income in people's pockets ahead of the next election - hence the 2p cut in National insurance. This, however, was at the expense of much needed longer-term reforms.
It is a pity that he did not use the same argument to allow Stamp Duty Relief for last time buyers which would have more impact on the housing market by downsizing among older homeowners, allowing younger people to get on the housing ladder.
It was also interesting that the Treasury mantra of making efficiency savings – a euphemism for cuts – has been replaced by 'productivity plans'. This pushes the idea that investment in productivity would help offset smaller departmental budgets - what used to be called austerity.
Aiming to improve the productivity of the NHS is admirable - but not if there is no agreed definition of what it means. In this case it seems it is about investing in computerisation. Not that this is a bad idea, but readers should be aware that the public sector is replete with examples of cost overruns on gold-plated computer systems which were managed by bureaucrats and failed to deliver savings.
Professor Joseph Pearlman, Professor of Macroeconomics, has previously held the roles of Research Associate at the European Central Bank and the IMF. He responded:
Jeremy Hunt’s autumn statement gave the impression that he was, unusually for a chancellor since the Tories came into power, taking the advice of the civil servants at the Treasury.
This time there is a further 2% decrease in the NIC rate, at the expense of increasing public sector debt, clearly an overt political decision in light of the forthcoming general election.
A big change to government revenues is due to non-dom tax status being abolished, so tax can now be raised on overseas earnings.
Capital gains tax on property is reduced, which is obviously a tax break for the rich.
£3.4bn will be used to update IT for the NHS, supposedly leading to time savings worth £35bn, but we have seen how disastrously wrong such plans have gone in the past.
The levy on energy companies’ profits has been extended further to 2029, with Hunt predicting an increased revenue of £1.5bn, a response to the general view of excess profit-taking by the sector.
A potential boost to real capital investment by firms is the additional £5000 annual tax-free savings allowance for ISAs investing in UK stocks. This seems to be the main engine in the budget for growing the economy, and the OBR is predicting further growth increases as a result of the budget as a whole.
Professor Steve Schifferes, Honorary Research Fellow in Financial Journalism responded to the Budget, commenting on public services and taxes:
This highly political Budget is clearly the starting gun in the General Election campaign. The Chancellor has managed £14bn worth of tax giveaways through a series of smaller tax increases and optimistic assumptions about productivity savings in the public sector.
The other battleground will be the public services. Although the Chancellor has said he wants to protect public services, by maintaining his plans to keep overall public spending at just 1% per year, the OBR estimates that the ‘unprotected departments’ such as courts, prisons, the police and local government will face real-term cuts of 6%.
The Chancellor has also been sailing very close to the wind with his fiscal rules, with only the tiniest margin to meet his own debt reduction rule.
With the economy still so weak, it is no wonder that there is little chance that the government will now call an early election.
Writing for The Guardian, Dr Sahil Dutta, Lecturer in International Political Economy commented on how proposed tax cuts are unlikely to tackle to the cost-of-living crisis:
Jeremy Hunt’s budget highlights a crucial issue facing our economy: the high costs of everyday living. Yet it does little to tackle the underlying problem.
Since 2008, wages and economic growth in Britain have stagnated while the prices that we pay for electricity, gas and travel have significantly increased.
Expel the major reforms the British economy needs from view, and cutting taxes seems like the only thing a government can actually do. But, coupled with the deep austerity to come, it really won’t help.
Professor Michael Ben-Gad, Professor of Economics and expert in tax and econometrics, responded to Hunt's plans on national insurance, tax burdens, military defence spending, stamp duty and the triple lock:
The drop in national insurance rates by 2% will cause the economy to grow a bit faster but the respite is likely to be very brief. As long as income tax thresholds remain, frozen fiscal drag will subject more and more income to higher rates of tax.
The plans outlined to cut spending do not seem particularly credible so the debt burden is likely to rise rather than decline, and the cuts are likely to be inflationary in the long run.
The main drivers behind the UK’s rising tax burden are associated with providing healthcare and pensions for an ageing population, combined with low economic growth.
Low economic growth also means fewer resources for defending the country from foreign aggression. We will just have to pray that Mr Putin will wait patiently till "economic conditions allow increased defence spending".
It would have been good to get rid of some of the cliff edges in income tax that can yield absurdly high marginal tax rates, though income tax cuts would have been more expensive and shared with pensioners (who benefited from recent policies such as the triple lock).
If the Chancellor really had £15 billion to spare (he doesn’t), this would be better spent on abolishing stamp duty, which discourages people from moving house. Another inefficiency is the mismatch it creates in the housing sector, discouraging the elderly from downsizing so that young families can purchase the larger houses they need.
Hunt announced he will deliver tax breaks for the film and theatre industry.
Professor Mattias Frey, a film and media industries scholar and the Head of the Department of Media, Culture and Creative Industries said:
Given how the UK punches well above its weight in terms of a skilled film workforce, world-class production facilities and also a long tradition of hosting international film productions, the plans to spur on lower budget domestic films has the potential to be a shot in the arm after a year affected by the Hollywood writers’ and directors’ strikes.
Discussing tax cuts, Dr Paulina Roszkowska, Senior Researcher at Bayes Business School (formerly Cass), said:
All tax cuts are welcome! If applied smartly (and not just to win votes), they can give a further kick to our economy’s recovery. But let’s not forget that we still have material issues to deal with.
For example, the storm in banking is not over.
If continuing high interest rates and the crisis in commercial real estate in the US impose further threat to their banking system, the UK might be a “next of kin” victim. And let’s remember, we don’t want our personal taxes to fund yet another “Silicon Valley” bank bailout.
Dr Lauren McCarthy, Senior Lecturer in Corporate Social Responsibility responded to Hunt's promises on increased childcare provisions. She said:
After an appeal for sense from childcare providers and charities, the government appears to have realised that their ‘free’ childcare provision introduced last year needs actual capital behind the rhetoric.
Whether the money provided in this budget will do much to reduce the predicted mass closures of childcare provision remains to be seen. These services are increasingly being asked to do more, with less.
Further, large areas of the country are childcare ‘deserts’ where there are simply no providers available to parents, funded places or not. The early years childcare problem needs serious funding in order to plug gaps in workforce, many of whom are women who have left employment as childcare has become so expensive.
This was an underwhelming budget from a government in a very tight corner.
Warren Buffett said that 'When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.'
Rishi Sunak and Jeremy Hunt may now understand what he meant.
Professor Richard Curran, Head of Aviation Management, Chair of Sustainable Aviation in the Engineering Department of the School of Science & Technology said:
It is interesting to note that the Chancellor has gone ‘light’ in terms of the cost of fuel in his budget, relative to the support announced two days ago regarding investment in the sustainability of air transport and aviation in the UK.
We heard several days ago about substantial funding allocated towards aerospace R&D in terms of energy efficient and zero-carbon aircraft technology. One wondered how this would further fit into the budget to be announced today, with reference to people’s anticipation regarding fuels and taxes in particular?
The significant investment referred to included companies such as Marshall working on zero-carbon energy systems through smart, connected, liquid hydrogen fuel systems, and Airbus working on carbon-fibre based upper wing skins and their associated manufacturing production systems.
Now however we have just heard that Hunt will maintain the supposedly “temporary” 5p cut in fuel duty and further extend the freeze in fuel duty. The commitment to NetZero 2050 for aviation is inherently connected with reduced carbon energy and fuel use and so one wonders how these somewhat diverging approaches fit in a coherent and consistent inferred policy relating to fuel, energy usage and emissions strategies.
The UK is also investing heavily in the development and availability of Sustainable Aviation Fuels (SAFs) which is a major focus area of the sustainable aviation operations research carried out at here at City, University of London. Obviously, one of the obvious policy levels would be to increase the cost of carbon-based fuels in order to use standard Market-Based-Mechanisms to help make SAFs more attractive to both producers and the airlines who want and need them at a competitive price.
One asks, how does maintaining the temporary cut of 5p and extending the freeze in fuel duty in general help the cause of zero-carbon transportation, whether aviation, automotive, rail or marine?
Budget predictions
The 2024 Spring Budget landed in a general election year, against the backdrop of a recession, a councils crisis and the employment rate still sitting below pre-pandemic levels.
With Labour predicted to win, the Budget could be considered a Conservative effort to win over British voters following two by-election losses, with some media outlets suggesting a national election could follow as soon as Thursday 2 May.
Speaking ahead of the announcement, Professor Steve Schifferes, Honorary Research Fellow in the School of Policy & Global Affairs wrote in The Conversation:
UK chancellor Jeremy Hunt’s aim on March 6 will be to convince voters that the Conservatives are a tax-cutting party.
Estimates by the government’s Office for Budget Responsibility (OBR) will likely show that Hunt only has “headroom” for around £13 billion in tax cuts.
Some people want Hunt to abolish inheritance tax or remove stamp duty on the sale of property. In November, Hunt argued that cutting NI was preferable to cutting income tax as it helped to boost employment at less cost to the government.
He could increase taxes that target only a small proportion of individuals, such as on vapes and tobacco.
There is also speculation that he might tax “non-doms”, despite ruling it out in the past.
In the same vein, Hunt is reportedly considering using Labour’s plan to extend the windfall tax on oil and gas companies beyond 2028.
John Mahoney, Social Welfare Lawyer and Visiting Lecturer at The City Law School, commented on the Renters Reform Bill, given that budget announcements affecting renters could coincide closely with the bill:
Abolition of the no fault section 21 route for evicting private tenants will remove uncertainty for renters, who are often unsure if to put down roots in a particular home or take a certain job due to the laissez-faire practice of allowing renters to be evicted for no given reason. However, landlords are stating that they will sell vast chunks of their property empires rather have to rely section 8 eviction notices.
"The legal reasons landlords can use section 8 notices are:
- ground 8 - if a tenant owes at least 2 months' rent
- ground 10 - if a tenant owes some rent
- ground 11 - if a tenant keeps paying their rent late
"A landlord can use ground 11 even if a tenant does not owe rent when they give the tenant notice.
"I think there are still plenty of appropriate ways that landlords can evict tardy tenants. And, if landlords throw their toys out of the pram and sell off lots of their rental properties, this should help renters become first time buyers.
For the UK to emerge out of the economic malaise, the government must shift the narrative and make it the best place in the world for enterprise creation and scaling up.
I am curious what measures the government will announce to boost entrepreneurial aspirations. Introducing initiatives that drive entrepreneurial aspirations and can-do attitude can help solve the productivity puzzle. One credible option is to increase the percentage of employee ownership in the UK.
We know the government is already working on initiatives which will tighten the requirements for domicile of trustees of Employee Ownership Trusts (EOTs). I will be curious to see what the government plans are for increasing employee-involvement and voice in the EOTs. Research shows that when employees identify themselves with the company and see that they have a voice, they feel the drive to personally excel and deliver.
Dr Orkun Saka is a Senior Lecturer in Economics in the School of Policy & Global Affairs with expertise in the labour market regulation and tax reform. Discussing a potential decrease in national insurance contributions, he said:
Jeremy Hunt’s spring budget seems to have the biggest weapon as the proposed 2% decrease in employees’ national insurance contributions.
While this might be a less costly way for the government to boost employment and push up the labour supply, it also comes at a cost of redistributional burden on the British society.
Those who will benefit most from this policy are projected to be the employees who earn above £50K while those who earn below the median income (~35K) are going to be reap only one third of the benefits accruing to the high-earners.
Not surprisingly, conservative government does not seem to care too much about the existing inequalities and is looking for a cheap way to boost support among voters before this year’s general elections.
This type of short-sighted policies happen quite often especially in the context of developing countries such as Turkey where my own research has shown how costly such electoral cycles in government policies could be and how they could distort local economic activity.
The only hope is that British society would not be so myopic and correctly judge in elections the overall economic performance of the Tories rather than the few perks that they distributed on their way out.
