Five things to watch at the Budget

Good afternoon. This is your midday market update from City AM.

At long last, it’s Budget day. A moment for Britain’s new Chancellor, John Healey, to set out his stall and differentiate himself from his predecessor.

We’re not expecting fireworks at the dispatch box today. Healey will be mindful of the pain wrought by the tens of billions in taxes raised across the last two budgets, as well as choppy bond markets that will punish him for any borrowing extravagance.

Instead, Healey has talked up the prospects of a “breathing space Budget” – something a little quieter and gentler than what came before it.

Among the announcements we expect today include: hikes to taxes on banks, scrapping standing charges on gas bills, reversing the cut to the cash ISA, and increased funding for so-called Pufins – public financial institutions such as the British Business Bank.

But beyond the headline-grabbing policies, here are some other areas we will be looking out for this afternoon.

There is growing chatter in Westminster that Andy Burnham could be preparing the Labour machine for an early general election to take advantage of his boost in the polls.

Recent announcements of “everyday fixes”, such as a proposal to fine noisy train and bus passengers, are thought to be a clear indication of his intentions.

We’ll be on the lookout for any signs in Healey’s speech that he’s in campaign mode – and any policy announcements that fit the definition of pre-election giveaways.

Who we help. Wealth management, financial planning and investment advice for individuals, families, businesses and charities across the UK.

Notwithstanding whether an early election is on the cards, a muted Autumn Budget could point to a noisier Spring Budget, allowing Healey to bide his time and wait for calmer bond markets before pulling the trigger on some bigger spending moves.

“Part of the reason that you do a relatively quiet Budget this year is you hope that by the time you get to the spring, things are looking a lot better because your fiscal year has rolled over,” said RSM chief economist Tom Pugh.

“You hope that inflation has come back down, that energy prices are down and gilt yields have come off.

“So actually you could in the spring be looking at having ten, fifteen billion to play with all of a sudden having done absolutely nothing – and that sets you up quite nicely.”

Taking a strong stance on the debate over levels of defence spending is what got Healey his job in Number 11. It would be unconscionable, therefore, for the Chancellor to avoid talking about the defence budget in his speech.

We’ll keep a close eye on precisely how much he wants to increase defence spending by – and how much he will rely on tweaking fiscal rules or bending the definitions of what is included in the defence budget to get him over the line.

Healey is not going to up spending levels to the 3.5 per cent of GDP that Nato members have pledged – what matters more, at this stage, is that he charts a credible path to getting there by 2035, that keeps MPs onside.

Among the biggest determinants of Labour’s spending power over the rest of this parliament will be the Office for Budget Responsibility (OBR)’s growth projections – and one of the biggest variables at play here is how economists expect the UK population to change.

Some commentators have already predicted a net-migration decline as soon as this year. If the OBR agrees, and thinks that trend is set to continue, it will have major ramifications for economic output and government tax receipts.

“The  growth rate of the UK population aged 16+ assumed by the OBR in March 2026 is likely to be slashed over the next three years as net migration slows leaving a UK population that is on track to be more than one million fewer by the end of the decade than was expected,” said Simon French, chief economist at Panmure Liberum. 

“Whatever the politics of this change… this makes potential output growth harder to achieve.”

Aside from population expectations, projections on output per worker will also be a key factor determining Healey’s future spending power.

Recent data suggests UK productivity has been trending higher than previously thought, and could point to an excess of pessimism in previous OBR reports.

Healey will be hoping the OBR will adopt a more rose-tinted approach and revise up its productivity expectations this time round.

Would you like to advertise with us or become a sponsor? Please reach out to: [email protected]