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LEI Budget response — March 2024

Budgets in an election year always have a slightly idealistic feel. In the time-honoured tradition of laying fiscal heffalump traps for the Opposition, Governments often use them to indulge in unusual levels of largesse. The usual laws of economic gravity are temporarily willed out of existence, and unfunded tax cuts and spending increases are carefully arranged so the benefits are felt immediately, but the costs fall conveniently on the far side of polling day. The Opposition, of course, is left looking either profligate or callous if it questions the new plans—and in both cases unelectable, or so the Government hopes.

 

Today’s (n.b. 6 March 2024) Budget announcements are no different. With the well-trailed additional 2p cut to National Insurance, the Government has doubled down on the previous 2p cut announced in last November’s Autumn Statement. Despite protestations to the contrary in the lead-up to the Budget, HM Treasury also found fiscal space to reduce capital gains tax, raise the VAT registration threshold, and freeze fuel duty at its current rate. The hole these decisions leave in the Treasury’s finances are, in turn, set to be funded by measures to boost public sector efficiency, a new vape excise duty, and the replacement of ‘non-dom’ tax status with a residency-based criteria system.

 

All in all, petty tweaks and variations aside, the Government has largely continued with the mantra that has shaped its political economy consistently since 2010: stand back and see what happens. Get the state further out of taxpayers’ wallets, with public services the main casualties, despite clear evidence that the UK public are perfectly happy to pay to keep getting the things Government provides. Leave individuals more spending money, and eventually it will find its way into consumer goods and services, and get the country back on the path to growth.

 

The danger is that, as Government retreats further and further from an active role in the economy, it loses its capacity both to overview what is happening and to step in when the going gets tough. With the UK now on the recession side of stagnation, there is no indication that Government has a coherent long-term plan for growth—especially one that focuses less on underconsumption and more on the UK’s chronic productivity lag across the whole economy, not just the public sector. For all the Budget’s pyrotechnics on personal taxation, it offers little to encourage personal or business investment in productive physical or human capital.

 

The Government might argue that cutting the personal tax burden leaves workers and the self-employed more money they can put towards technology upgrades or upskilling. But this is not the same as actually helping and supporting them to do so. Nothing about the structure of corporate tax incentives has made UK businesses more likely to put money towards training up their staff. And with costs of living and interest rates at sustained highs, any additional money in workers’ pay packets is likely to be swallowed up by rental or mortgage payments and bills—or in savings, given the new British Savings Bond and changes to the ISA system.

 

There is no shortage of measures the Government could have prioritised, instead of its quixotic pursuit of lower taxes at all costs. Five obvious ones are apparent right from the get-go:


  • Lower the threshold for businesses to pay the apprenticeship levy and introduce a progressive step system to levy rates: the 0.5% rate applied to businesses with over £1m in payroll, rising to 1.25% for those over £2m, and 2.5% for those over £3m.

  • Introduce a strategic skills tax credit at a rate proportional to the number of apprentices and placement learners a business employs, and the number of workers taking new skills courses, and a strategic innovation multiplier to the Annual Investment Allowance.

  • Consolidate all skills and education development funds into a single Productivity Investment Fund earmarked for large-scale human capital investment projects, supported by underspend from the apprenticeship levy returned to HM Treasury.

  • Instead of cutting NI by 2p, hypothecate this proportion of NI revenues to support the Productivity Investment Fund, turning it effectively into a National Skills Contribution.

  • Allow workers and the self-employed to deduct the cost of training and upskilling courses they have completed from their overall annual taxable income.

 

These are simple yet transformative measures that the Government could introduce to galvanise growth in all sectors of the UK economy. In their absence, it is hard to read this Budget as anything other than a wasted opportunity. Yet again, as it winds down the election clock, the Government has failed to put in place clear changes that would lay the foundations for a new political economy—focused on skills, empowerment, and strategic foresight.

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