Spring Budget 2024 - a view from the market

At last year’s Autumn Statement, we recalled a children’s joke about an election elephant’s footprints in the butter. In today’s Budget that elephant seems to have covered its tracks. The overall package of measures was much smaller than had been thought possible and even those that were delivered left the OBR warning that the margin of safety was “only a tiny fraction of the risks around any forecast”. Financial markets were again unmoved and the betting market eased back on the odds given for an early election.

Ahead of the event

Coming into today’s Budget, the focal point of speculation seemed to centre around how much so-called ‘headroom’ the Chancellor would have with which to pull any tax-rabbits out of the hat.

That headroom is the difference between his self-imposed ‘fiscal rule’ which requires that national debt as a percentage of GDP is falling in the final year of the OBR’s five-year forecast. The amount by which it is forecast to be below the prior year level is the headroom within which to frame any tax reductions.

A particular difficulty with that rule is that it rests effectively on the small difference between two very large numbers; and small differences can easily be swamped by tiny percentage changes in the big numbers, for example, the out-turn in growth forecasts or tax receipts.

In his 2023 Autumn Statement, the rule offered the Chancellor some £31bn of headroom, according to calculations by the Institute for Government, of which he used £18bn on the various measures announced then, including the reductions in National Insurance by two percentage points.

That left a notional but wafer-thin £13bn of headroom for today’s Budget - again on IfG calculations - assuming no intervening changes to assumptions for growth and spending. On a later set of assumptions, notably including intervening falls in long-term interest rates, the Resolution Foundation estimated that the headroom available to the Chancellor could be some £23bn - enough for 3+ % off the basic rate of income tax.

That didn’t happen. Here’s why.

On the day

In fact, the OBR’s latest assessment showed the headroom to have fallen modestly to £12.2bn before the effect of any of today’s announcements. Those were dominated by the heavily-trailed cuts to National Insurance by a further two percentage points for both employees and the self-employed, which measure alone is likely to have taken the majority of the £12.2bn headroom. Hence no cuts to income taxes.

Such additional tax cuts as were announced - eg extending the freeze on alcohol and fuel duties - were more than offset by an estimated £4.5bn of additional tax revenue through tougher HMRC enforcement measures, £2.7bn estimated from abolishing/ replacing the current ‘non-dom’ system and £1.9bn by extending for another year the windfall tax on energy companies; and an increase in debt.

In the end the OBR forecasts that the headroom left after all of today’s measures falls only to £8.9bn thus meeting his self-imposed ‘fiscal rule’ but by a margin it describes as “a tiny fraction of the risks around any forecast”.

Political implications

At the time of the Autumn Statement we spoke of the election elephant in the room and recalled a popular children’s joke: how do you know when an elephant’s been in your fridge? There are footprints in the butter. The 2% cut to NICs at that time plus other measures seemed to keep open if not encourage the scenario of a Spring election this year.

If that was the intention then the elephant seems to have been covering those tracks today. The overall package of cuts is much smaller than many had thought and will take time to feed through; the last round of NICs cuts did not do much to alter the opinion polls in favour of the ruling Conservative Party and the cuts to income tax - much hoped for in some quarters - were not delivered.

As we noted earlier, among the market indicators we track to assess broad reaction to any fiscal event, the only one to have moved in any degree was the implied probability of an election in Spring - which eased back several notches.

We’ll know soon enough, or at least have a much better steer: if there is to be an early general election to coincide with the already scheduled local government elections on May 2nd, its announcement and the consequent decision to dissolve the current Parliament will have to be made no later than March 26th according to the parliamentary rulebook.