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UK in Focus – Budget Special: Parting gifts?

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There was no magic money tree in the latest UK Budget, so tax cuts had to be funded by tax rises elsewhere, plus lower headroom. While the measures will boost near-term household incomes, personal and overall taxation is still going up. All in all, this Budget may not be a game changer for growth, inflation or interest rates.

Tax cuts paid for by offsetting rises and lower fiscal headroom

In the last full Budget of this parliamentary term, UK Chancellor Jeremy Hunt has delivered a set of policies that will neither spook the markets nor thrill the electorate, in our view. He was determined to cut personal taxation and he has done so, taking another 2p off employee National Insurance Contributions (NICS), effective from this April. In other giveaways, there was an alcohol tax freeze and the usual postponing of higher fuel duty, as well as a rise in the salary threshold at which child allowance is withdrawn.

Unfortunately for Mr Hunt, there was no magic money tree, as there was in the Autumn Statement, to pay for these cuts. This time he had to fund them, through a combination of tax rises – including from two of the opposition Labour party’s policies on non-domiciled tax status and energy windfall tax – and reduced headroom against the fiscal targets. He now has a margin of just under GBP9bn (down from GBP13bn in November), and the Office for Budget Responsibility (OBR) estimates just a 54% chance that the debt-focused target is met.

When you add up the effects of cGBP21bn of personal tax cuts, alongside a 10% rise in the National Living Wage (8% in real terms, based on our inflation forecasts), and likely interest rate cuts, it does look like being a distinctly better year for households. Any corresponding rise in demand risks keeping inflation higher for longer. But the incremental stimulus in this Budget is unlikely to move the needle for the Bank of England: the larger-scale easing from the Autumn Statement only caused it to raise its GDP forecast by 0.2-0.3%, with a smaller impact on inflation. Moreover, overall taxation in the UK is still forecast to rise – just by a bit less than previously.

Even so, it looks like being a decent April for household finances, and Oddschecker still sees a 23% chance of an election in Q2. If it’s going to be held on 2 May (alongside local and mayoral elections), it has to be called by 26 March – so watch this space. For whoever wins that election, though, the challenges still look formidable. ‘Fiscal fictions’ in the forecasts mean they may have to either deliver austerity or raise taxes. And the OBR’s forecasts on growth, inflation and interest rates may also prove too good to be true. It’s not going to be easy.

The Macro Brief

For a more detailed review of the budget, listen to the latest Macro Brief Podcast from our Global Research team, where Simon Wells, Chief European Economist, assesses the state of the UK’s public finances, looking at some of the broader implications of the budget and what’s next for the BOE. HSBC Global Research

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