In the aftermath of a recent budget announcement in the UK, Richard Hughes, Chair of the Office for Budget Responsibility, shared insights on the fiscal roadmap unveiled by Chancellor of the Exchequer, Rachel Reeves MP. The 2024 Economic and Investment Outlook highlighted significant changes, painting a picture of increased spending, taxes, and borrowing, coupled with a renewed focus on economic growth and fiscal sustainability.
Here are five key takeaways from the latest government budget:
- Spending Surge: The new government plans to ramp up spending by £70 billion annually for the next five years, with a two-thirds allocation towards day-to-day expenses and the remaining third directed at investments. This move is set to raise the State’s size relative to the economy, settling at 44% by 2030, marking a 5% increase from pre-pandemic levels.
- Taxation Tweaks: Over half of the spending increment will be covered by tax hikes, generating an additional £36 billion per year in revenue. The bulk of this increase stems from a rise in employers’ National Insurance Contributions, pushing the overall tax burden to 38% of GDP by the decade’s end, hitting a record high.
- Borrowing Boost: The remaining portion of the spending surge will be funded through increased borrowing, resulting in a slower decline in total government borrowing. This trend translates to an annual £32 billion hike in government borrowing, maintaining around 1% of GDP.
- Economic Stimulus: The infusion of additional government borrowing is anticipated to deliver a temporary boost to the economy, with GDP growth projected to reach 1.1% this year and 2% the following year. However, the budgetary measures are forecasted to leave the economy stagnant in the final year of the budget cycle.
- Fiscal Rules: To accommodate the augmented borrowing, the government has established two new fiscal rules for the upcoming five years. The first rule seeks to balance the current budget with a £10 billion buffer, while the second aims to reduce the net financial liability in relation to GDP by £16 billion.
In conclusion, the surge in government spending, coupled with tax adjustments and increased borrowing underpins a strategy to propel economic growth while maintaining fiscal prudence. The new fiscal rules provide a roadmap for navigating the economic landscape in the years ahead, emphasizing the government’s commitment to sustainable financial stewardship. As the budget unfolds, the implications of these policy shifts will be closely monitored to gauge their impact on the UK’s economic landscape.
