Jeremy Hunt ‘will cut national insurance by 2p in the budget’
Back in the political world, Steven Swinford of The Times reports that tomorrow’s budget will include a national insurance cut of two percentage points.
A 2p in the pound reduction will cost an estimated £10bn, he reports.
That would take up most of the £13bn in fiscal headroom which the chancellor is thought to have to spend, and still have debt falling as a share of GDP in five years’ time.
Our Politics Live blog has all the latest from Westminster:
Key events
NI cut would be more like a ‘tatty-looking ferret’ than a rabbit
Even if national insurance rates are cut tomorrow, many workers would still face being dragged into paying income tax, or paying it at the higher rate, due to the freeze on income tax thresholds.
That freeze is causing significant ‘fiscal drag’, as rising wages push more people into tax higher bands.
Sarah Coles, head of personal finance at Hargreaves Lansdown, says:
“Reports suggest Jeremy Hunt has decided to cut National Insurance by 2p in the Budget. It wouldn’t be so much a rabbit pulled out of a hat as a slightly tatty-looking ferret dragged from a box, labelled ‘rabbit’. An income tax cut has been discussed for well over a year. A National Insurance cut would be far better than nothing, but it would be a scaled-down, less attractive option. Jeremy Hunt would just have to hope it didn’t bite.
With taxes swallowing such a massive proportion of GDP, any tax cut would be welcome. This one would save us an average of £450 a year. And while the biggest savings would be reserved for those earning more, every saving helps at a time when our own budgets are stretched so thin.
t’s easy to see why this may have pipped income tax to the post in the race for Budget tax cuts, because it’s much cheaper. A 2p cut would cost about £10 billion, which is more manageable for a Chancellor with shrinking headroom. However, the price Hunt would pay for opting for NI is clear. It would benefit fewer people. 27 million workers would pocket a tax cut, but millions more wouldn’t, because it wouldn’t affect the tax on pensions, and income from savings and investments like property. It means an awful lot of voters would get no benefit from the change.
Coles also points out that January’s cut to National Insurance hasn’t made a dramatic difference in the polls:
It may be that Jeremy Hunt has decided this is all he can afford to offer right now. The question will be whether it’s a enough of a blockbuster tax cut to move the dial on a general election.
Unfortunately, if NI is cut, it’s not as good as it may sound, because it would come at the same time as yet another freeze in the personal allowance and the higher rate tax threshold, which the OBR says will see 1.1 million more people dragged into paying income tax and 800,000 more forced to pay higher rate tax. It means the government would be giving with one hand and taking away with the other.”
King Charles and Jeremy Hunt pictured together ahead of Budget
The King has held an in-person pre-Budget audience with Jeremy Hunt at Buckingham Palace today, ahead of tomorrow’s fiscal event.
It’s traditional that before a Budget is presented, the Chancellor of the Exchequer meets with the monarch, usually the day before the Government’s plans for the economy are delivered in a statement to the Commons (at 12.30pm tomorrow).
Sky News are also reporting that the chancellor will cut national insurance by a further 2p in the pound in the budget tomorrow.
Their political correspondent, Matthew Thompson, says a debate has been “raging” inside Downing Street for the last few weeks about whether to cut NI rates or income tax.
There are two reasons why NI has been chosen, Thompson says.
One, it’s cheaper, as only paid by those in work, not those who are retired.
Two, this meant is is less inflationary.
But, he adds, an income tax cut is potentially the better option politicially, as people understand it more.
There is a fear within the government that they may not get “the political dividends they’re looking for” through a NI cut, Thompson adds – after all, Hunt announced a 2p cut in the autumn statement, and the Conservatives are still lagging well behind in the polls.
Yahoo Finance have details on what a 2 percentage point cut to national insurance would mean in practice:
Employees and self-employed workers currently pay 10% on earnings between £12,570 and £50,270 in Class 1 national insurance contributions.
This was reduced from 12% of earnings in the autumn statement, although the threshold to start paying — £12,570 — is frozen until 2028.
Analysis by the investment platform AJ Bell reveals that cutting the national insurance rate by two percentage points from 10% to 8% would be worth almost £250 to someone on a yearly salary of £25,000, with a maximum saving of £754.
Rachael Griffin, tax and financial planning expert at City firm Quilter, says:
It looks like Chancellor Jeremey Hunt has opted for the cheaper and potentially less headline grabbing option of cutting national insurance by a further 2%. This means that millions of hard-working Britons will see more money in their pockets every month, as the government tries to ease the pressure of the highest tax burden in decades. While a cut in taxes will for some be a needed boost, it hardly turns the dial much considering we are dealing with a historic tax burden at present. However, it will certainly be a crowd pleaser with someone earning £30,000 a year being around £58 better off a month if you also take into account the national insurance cuts in the Autumn Statement. However, many people don’t understand how national insurance works and a cut to income tax would have been easier for all to understand but crucially much more expensive
After the budget tomorrow, the Office for Budget Responsibility will give its verdict, alongside its latest forecasts for economic growth, borrowing, inflation and unemployment.
Economists predict a slightly downgrade to the OBR’s short-term growth prediction, PA Media reports.
In its previous forecast in November, the OBR had predicted 0.6% growth in GDP for 2023, with 0.7% growth in 2024.
However, last year the UK economy ultimately fell short of this, with 0.1% growth in GDP, according to the Office for National Statistics (ONS).
This was lower than expected after a contraction over the final half of 2023, which also meant the UK was in a technical recession.
Economists expect the UK to swiftly return to growth after the recession but widely predict subdued growth in 2024, with projections below the OBR’s previous forecast.
Experts at Pantheon Macroeconomics and Oxford Economics are both expecting 0.4% growth in 2024.
Pantheon said it expects lower-than-expected growth to cut tax revenues by around £4bn this year, although this is expected to dissipate over the next five years.
UK government bond prices are strengthening today, an indication that City traders are not too anxious about tomorrow’s budget.
This is pushing down the yield, or interest rate, on UK 10-year bonds (yields fall when bond prices rise, and vice versa).
Bond investors will be hoping that any tax cuts are ‘funded’, either through other tax increases or through spending cuts, rather than requiring additional borrowing.
How NI cut would benefit richer households
A 2p cut to national insurance rates would benefit wealthier households much more than poorer families.
The Institute for Public Policy Research thinktank has calculated that nearly half the benefit would go to the richest 20% of households, while just 3% would end up in the pocket of the poorest fifth of us.
Jeremy Hunt is also contrained by fears that the financial markets could wobble if he risks unfunded tax cuts.
Mike Coop, chief investment officer at Morningstar Investment Management Europe, says investors could push up UK borrowing costs if Jeremy Hunt takes risks:
“We see very limited scope for any sizeable tax, spending, borrowing, or regulatory changes and hence expect a muted economic and market impact. The government is severely hemmed in by a ferocious foursome of big debt, anaemic growth, threadbare public services, and high tax rates.
Markets have put the government on a short leash after the Truss mini-budget so any giveaways based on heroic assumptions about future growth and spending cuts will risk a rise in interest rates, no matter how politically compelling in an election year when Reform UK is on the rise.
“There is scope for funding up to £15 billion of tax cuts and spending increases due to shifts in inflation, interest rates and tax receipts compared to prior forecasts, though the government may choose to keep some dry powder for the Autumn Statement just prior to an election.
UK budgets get far more attention than they really deserve, argues Kallum Pickering, senior economist at Berenberg bank.
For two reasons, this is probably the case for tomorrow’s performance, he explains:
First, the government simply does not have the fiscal headroom to give the economy a big shot in the arm.
Second, as power is likely to shift to Labour later this year, at best, tomorrow’s announcements may be valid for between six to nine months before the five-year plans are torn up and rewritten by the next (likely Labour) chancellor.
That limited ‘fiscal headroom’ is measured against the government’s aim to have debt falling as a share of the economy in five years time – a “ludicrous target”, according to Paul Johnson of the Institute for Fiscal Studies.
See here for more on the fiscal rules:
Pickering also warns that while household-friendly tax cuts may help lift support for the Conservatives, they probably won’t dramatically change the economic outlook for the UK.
He says:
Nominal domestic spending (a proxy for demand) has been rising solidly but due to COVID-19 and war-related supply shocks, the UK has struggled to meet demand with sufficient supply – as indicated by stalling real GDP.
Better economic performance hinges on a recovery in supply. Tax cuts would boost demand when the situation for households is already improving. Real wages are rising and the labour market is strong.
If the Bank of England judges that tax cuts add to inflationary pressures, policymakers may be inclined to cut rates by less this year – de facto neutralising the impact of tax cuts.
Steven Swinford also explains why cutting national insurance is cheaper than a cut to income tax:
Cutting income tax is significantly more expensive as it benefits both workers and pensioners.
A cut of two percentage points in employee national insurance costs about £10 billion a year, while a 2p cut in income tax would cost £13.7 billion a year. There are also concerns that cutting income tax would be inflationary.
More here (£).
Jeremy Hunt ‘will cut national insurance by 2p in the budget’
Back in the political world, Steven Swinford of The Times reports that tomorrow’s budget will include a national insurance cut of two percentage points.
A 2p in the pound reduction will cost an estimated £10bn, he reports.
That would take up most of the £13bn in fiscal headroom which the chancellor is thought to have to spend, and still have debt falling as a share of GDP in five years’ time.
Our Politics Live blog has all the latest from Westminster:
UK PMIs: what the experts say
February’s healthcheck on UK purchasing managers shows the services sector achieving continued growth, says Jenny Etherton, Director at PwC UK:
“The UK services sector is showing considerable resilience, with the PMI posting 53.8 in February – growing for the fourth consecutive month.
“Buoyed by new demand, especially from the US and Asia, services firms have been able to increase their prices and pass on rises in both wages and shipping costs to customers.
“Anticipation of lower interest rates, possibly materialising sooner than expected, has contributed to the growth of both business and consumer confidence. Despite the continued uncertainty around global economic and geopolitical conditions, almost 60% of the PMI’s survey panel expect business activity to rise in the coming year.
Kathleen Brooks, research director at XTB, points out that today’s PMI readings aren’t quite as strong as the flash readings taken during February.
She’s aso concerned that retail sales were weak last month (see opening post), which has been blamed on bad weather:
There was some signs of a softening in the UK economic data for last month.
The BRC like for like retail sales report for February was weaker than expected, rising by 1%, down from 1.4% in January, and lower than the 1.6% expected. The UK services PMI was also revised lower for February, to 53.8, vs. 54.3 initially. This also lowered the final composite PMI reading for February, which fell to 53, from 53.3. This is still the highest reading since May 2023, and new orders also rose last rose month, which is a sign that the economy remains strong. Overall, the February PMI surveys are still in expansionary territory, and they suggest that the UK economy bounced back in Q1, but maybe not as much as initially expected.
The UK economy outperformed the eurozone last month, although conditions are also improving across the channel.
S&P Global reports that the eurozone economy moved “closer to stabilisation in February” as the service sector returned to growth, for the first time since last July.
Overall, the eurozone private sector shrank again with the composite PMI Output Index coming in at 49.2. That’s up from January’s 47.9, but still below the 50-point mark showing stagnation.
The services PMI business activity index crept over that 50-point mark, rising to 50.2 in February from 48.4 in January.
Southern European countries are driving the recovery.
Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, explains:
“The (eurozone) service sector may be off to a better start in 2024 than anticipated. For the first time in seven months, the sector’s activity is expanding instead of shrinking. While the growth rate is fractional, it is complemented by positive developments in other PMI sub-indicators.
Particularly encouraging is the uptick in new staff recruitment by service providers, surpassing the sluggish growth rates seen in recent months. Moreover, the stability in incoming new business suggests a potential turning point in demand conditions.
Economic vitality in the Eurozone’s service sector stemmed predominantly in the South. Spain and Italy marked their sixth and second consecutive months of rising service sector activity, respectively, a contrast with Germany and France, where contractions continued.
UK economy ‘turning corner’ as private sector growth hits nine-month high
Newsflash: UK private sector output hit a nine-month high last month, a new survey shows, bolstering hopes that Britain is leaving recession.
The S&P Global composite Purchasing Managers Index, which tracks activity at services companies and manufacturers, has risen to 53.0 in February, up from 52.9 in January.
That shows a pick-up in growth, with service sector companies reporting a sustained increase in business activity last month, with the fastest rise in new work since May 2023.
Improving export sales helped to boost total order books in February, today’s services PMI report shows.
While output growth at service sector firms softened slightly in February, growth forecasts were the most upbeat since February 2022.
It suggests that the shallow recession that began at the end of 2023 may be ending, which should cheer the chancellor ahead of tomorrow’s budget.
Tim Moore, economics director at S&P Global Market Intelligence, explains:
“Another solid expansion of business activity across the service sector in February adds to signs that the UK economy has turned a corner after entering a technical recession during the second half of 2023.
New business intakes were a particularly bright spot as service providers reported the fastest order book growth since May 2023. Survey respondents cited rising business and consumer spending, linked to improved optimism towards the broader economic outlook.
Resilient export sales also provided support to service sector growth, as signalled by the strongest rise in new work from abroad for eight months.
BUT…. firms also reported that cost pressures have not abated.
The PMI report says:
On the inflation front, latest data indicated the strongest rise in input costs across the UK private sector since August 2023. Inflationary pressures intensified in both the manufacturing and service sectors in February, with the latter again posting a much faster overall rise in business expenses.
UK car dealers are also urging Jeremy Hunt to provide more incentives for people to buy electric cars, in tomorrow’s budget.
Following the news that UK car sales jumped in February, due to business customers, Sue Robinson, chief executive of the National Franchised Dealers Association (NFDA), says:
“It is promising to see that electric sales continue to grow after a bounce back last month, particularly as OEMs seek to meet the targets set by the ZEV mandate for this year. In recent months, this has primarily been driven by fleet rather than private demand.
“In spite of encouraging progress, it is crucial that the Government continues to work with dealers to attain the best outcomes for consumers.
“The Spring Budget provides a prime opportunity for the Government to keep this momentum going. NFDA urged the Government, in its Spring Budget submission, to increase consumer confidence in EVs through price incentives and improving electric charging infrastructure. NFDA also stressed to the Government to prioritise investment and growth in the UK automotive sector.”
UK’s new car market records best February for 20 years
It’s official: UK car sales hit a 20-year high for a February last month, driven by business customers.
There were 84,886 new car registrations last month, the Society of Motor Manufacturers and Traders has just reported.
That’s a 14% increase on last year, and the best performance for any February since 2004.
But…… this growth is being driven by business customers, expanding their fleets of cars. Sales to private buyers dropped by 2.6%.
The SMMT says:
It was the 19th month of consecutive growth, which has primarily been driven by fleets investing in the latest vehicles.
Indeed, fleets and businesses were responsible for the entirety of February’s increase, with registrations up 25.2% and 15.5% respectively. Private uptake continued to struggle, with a -2.6% decline to record a 33.7% market share. February is traditionally volatile as the lowest volume month of the year, with buyers often electing to wait until March and the new number plate.
Sales of battery-powered electric cars rose by 21.8% year-on-year, lifting their market share to 17.7%, while petrol sales rose 13.3% and diesel shrank by 7.4%.
As flagged earlier, the SMMT is also urging the chancellor to cut taxes on new electric cars, and lower the tax on public EV charging.
The group says:
While consumers do not pay VAT on other emission reduction technologies such as heat pumps and solar panels, private EV buyers pay the full 20% levied on all cars, whether they be electric, petrol or diesel.
Halving VAT on new EV purchases would save the average buyer around £4,000 off the upfront purchase price – yet cost the Treasury less than the Plug-in Car Grant that was scrapped in 2022.2