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As expected, there were no tax changes in the Spring Statement, but our personal sense of financial relief should be tempered with caution. I’m worried that by the time the fall budget comes, tax increases will be very back on the agenda.
Half of the UK’s economic growth forecast this year was a major blow due to budget responsibility. While Rachel Reeves’s vocabulary game of responsibility may have shifted from “black holes” to “global uncertainty,” the downgrade had little to do with Trump’s threatened tariffs and her £24 billion increase in her employer’s contribution to national insurance.
The largest tax measures in the budget last October will only come into effect next month. In other words, the UK economy still does not feel the full power of its impact. As businesses cut jobs, raise prices and compensate, both unemployment and inflation almost certainly increase, but even the OBR document estimates that three-quarters of the cost will be passed on to workers at “low actual wages.”
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This gave the Prime Minister a blank ring on the comments on protecting people working from the effects of high income tax, national insurance or VAT.
Despite this, Reeves did a good job making him sound very enthusiastic about so many numbers. The overall headroom for fiscal rules is still minimal, so the threat of future tax increases remains.
Attempts to promote growth through planning reform may be the right thing to do with increasing defence spending and relaxing financial regulations, but nothing moves the needle much. Also, weak job markets mean that consumer trust is already under pressure. OBR’s forecast that the average mortgage rate will remain high as more borrowers develop lower rate ERA transactions does not suggest that people will spend more as household finances remain constrained.
But one very large number stood out. This year, the £105.2 billion interest on services on government debt is more than the total budget for defense, plus the Department of Justice combined.
This underlines the Prime Minister’s mercy by the market. With so many domestic and global uncertainties, including the unknown effects of a global trade war, it doesn’t take much for borrowing costs to raise the notch and turn the small black numbers on OBR into a large red figure.
So, what does that mean for our personal finances? The Prime Minister was careful not to breathe whispers about tax increases on Wednesday, but it’s hard to see how she can avoid it if the search for growth doesn’t bring fruit. This risks several months of iteration damage to the tax speculation seen in the October budget last year, as investors tried to guess where the Prime Minister’s x would fall.
The country’s most respected tax experts have urged the government to be brave enough to consider bold reforms to stop messing around, simplify the system and address long-term issues to increase growth and productivity. I don’t think politicians will listen.
For now, the sentiment commonly expressed by FT readers is to continue to maximize taxes before the government cuts further. What’s not surprising to see investment platforms report an unusually high influx this year is a phenomenon known as “The Reeves Effect.”
The Spring Statement document still considers options for reforming the ISA, and hopes to “get a balance” between cash and stocks to “help the UK’s culture of retail investment.” But waiting for the changes in rules and tax increases that the October budget will bring is a culture of fear hanging among retail investors.
