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The Chancellor’s recent Autumn Budget contained a pledge to spend an extra £150bn over the coming years. This might come as a surprise, given that this is a Conservative government (the party traditionally known for low taxes and spending) and Chancellor Rishi Sunak shares former Chancellor George Osborne’s commitment to balance the UK’s day-to-day budget. Some clients are concerned about the direction this may take the economy, and the possible impact on their financial plan and household finances.
In this article, our financial planning team examines some possible reasons for the increase in spending. We also argue that this should not lead to immediate client concern. We hope you find this content useful. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Reason 1: politics
Prime Minister Boris Johnson won an 80-seat majority in the December 2019 General Election. Many of the new seats picked up by the Conservatives were in former “Red Wall” seats, where Labour had historically held strongholds. The Government is, understandably, keen to hold onto these seats, where many (e.g. Bishop Auckland) contain large numbers of poorer, left-leaning voters. By offering a “tax and spend” budget, the Government is clearly hoping to appeal to these voters and set themselves up for the next general election (which, some believe, may be held early – before the current 2024 schedule).
One thing is clear. This Budget – along with the extra COVID-19 spending since March 2020 – shows a departure from the “austerity agenda” under David Cameron and George Osborne (from 2010). This makes it more difficult for Labour to attack the Conservatives of “Thatcherite” behaviour, and position themselves to voters as the sole party of tax and spend. Arguably, the Government can also afford to alienate its right-wing voter base to some extent, because these voters have “nowhere else to run” (as Jeremy Warner puts it).
Reason 2: economics
The Government has announced that it partly expects to cover its extra spending commitments through tax rises. The new Health and Social Care Levy, for instance, is intended to raise £13bn per year for the NHS and social care. However, the vast majority of the extra spending will need to be funded by government borrowing (i.e. issuing bonds to investors). There are at least two economic reasons why Boris Johnson and Rishi Sunak may be raising departmental spending, which is predicted to increase even more than under the Blair/Brown years.
Firstly, the Office for Budget Responsibility (OBR) has forecast that the UK economy will grow at its fastest rate in 50 years – i.e. 6.5%, faster than during the 1973 “Barber Boom”. The economic scarring from COVID-19 is also expected to be 2% of GDP (lower than the 2% previously forecast), and the UK economy should recover to pre-pandemic levels by the end of the year. Taken together, this means that the deficit, over the next five months, should stand at 7.9% of GDP rather than the 10.3% forecast nine months ago. Setting the new spending pledges aside, this means that Government borrowing should be £51bn lower than previously thought, when the UK was still in lockdown. As such, the Chancellor likely thinks he has more financial wriggle room than he did before.
Secondly, it is still a very cheap time for the Government to borrow. The base rate set by the Bank of England (BoE) still sits at an historic low of 0.10%, which means that the UK pays low interest payments to bondholders. However, with inflation currently on the rise, it is looking likely that the base rate will increase in the coming years to counteract it. This, in turn, would make it more expensive for the Government to borrow. By borrowing now, instead of later, this could be a better way to keep the public finances stable.
Implications
What does all of this mean for your financial plan? This is spelled-out in more detail in our latest Autumn Budget Summary, available to clients. However, some of the main points for people to consider at this time include:
- Rising inflation. If this persists and rises (which growing evidence suggests it will), then this is likely to lead to higher costs for goods and services, including petrol.
- Rising taxes. From April 2022, dividend tax and National Insurance contributions will go up by 1.25%. This will place the highest tax burden on Britons in 70 years.
- Business support. The Covid Loan Recovery Scheme will be extended by six months, to June 2022.
- Wages. The National Living Wage will increase from £8.91 per hour to £9.50 from April 2022. The public sector pay freeze will also be lifted.
- Universal credit. The Universal Credit taper rate will be reduced from 63p to 55p. This will benefit claimants who are in work, as they will keep more of their earnings.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk