“A bleak Budget” with £40bn of tax rises and yet some sighs of relief says AJ Bell’s Khalaf

Laith Khalaf, financial analyst AJ Bell

Whilst taxpayers front up to £40 billion of tax rises they will be hoping this bleak Budget is ‘one and done’ says Laith Khalaf, head of investment analysis at AJ Bell. In the following analysis, Laith reflects on key changes in today’s budget statement and stresses why we should all be hoping for some fair weather ahead and a respite from further economic shocks as he comments:

“Make no mistake this was a bleak budget for taxpayers, but everyone saw it coming a mile off. The inordinate wait, doom-laden messaging, rampant speculation, and gradual leaking of key fiscal policies dented confidence and has inevitably led some people to make rash and, in some cases, irrevocable financial decisions. This is a new government, and it’s natural to try to get all the bad news out in the open early doors. From a low base, it’s easier for things to only get better. But the way this Budget has been scheduled and delivered, irrespective of the policies, has fostered a climate of fearful uncertainty.

“As it turns out, some fear was justified, as Rachel Reeves announced £40 billion of tax rises. However, with much of the burden falling on employers through higher National Insurance, there will be relief in some quarters, alongside misery in others. In particular, the decision not to freeze income tax thresholds out to 2030 will be welcomed by many, as will the continued freeze on fuel duty. But perhaps the fact some people will be counting their blessings despite £40 billion of tax hikes simply underlines the extent of the government’s miserable messaging in the run up to this Budget.

One and done?

“With £40 billion of tax hikes on top of an already high tax burden, businesses and consumers will be hoping this is a one and done raid on their finances by the new government, and that fairer climes lie ahead. But the OBR’s central forecast doesn’t show economic growth picking up significantly as a result of this Budget, and certainly not enough to secure the highest growth in the G7, a somewhat ambitious target seeing as the growth of foreign economies is well outside the control of the domestic government.

 
 

“Still, it’s good to have lofty goals, and simply ratcheting up the UK growth rate over a sustained period would be a considerable achievement, and positive for living standards and the public finances. But the OBR’s latest forecast actually predicts lower growth from 2026 onwards, compared to where things stood in March. There are many global macroeconomic factors which feed into these economic forecasts, alongside fiscal policy, but the OBR’s numbers don’t suggest a step change in the growth rate as a result of this Budget. The OBR does say that if the increased level of public investment announced in the Budget were sustained, it would permanently raise supply in the long term. Though as John Maynard Keynes remarked, in the long run we are all dead.

Inflation and mortgage rates

“The OBR forecasts also show that Budget policies will modestly push up inflation, which does make for higher interest rates, and hence mortgage rates. No doubt critics will seize upon this and draw comparisons with the rise in mortgage rates as a result of the mini-Budget presented by Liz Truss and Kwasi Kwarteng. While gilt yields have been rising as a result of the Budget, the scale of rises is as yet contained, and there is no sense of panic as there was in the autumn of 2022. Markets are digesting greater issuance of government bonds and rising yields reflect concerns over a greater supply of bonds, rather than the solvency of the UK, or indeed a new inflationary trajectory set by the Budget. If we want an independent central bank and governments to have a free hand in determining fiscal policy, which we hope should be economically stimulative, then slightly higher interest rates might be the price we have to pay.

Risks to the forecast

 
 

“Of course, there are risks to the economic forecasts. As we have seen time and time again, even the best laid plans can be blown off course by extraneous events, and there are plenty of known geopolitical flash points which give cause for concern, not to mention some unknown risks which may materialise out of the ether. Government debt levels exploded as a result of the pandemic and the energy crisis, and we will still be settling the bill for many years to come. Another economic shock would set debt repayment plans back once again and place more strain on taxpayers, so we should all have our fingers and toes crossed for some fair weather to permit us to repair the damage.”

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