Autumn budget 2024.
On October 30, 2024, Labour will deliver its first Budget since coming to power, with economic experts anticipating significant changes across several sectors. Amid promises to reduce NHS waiting times, tackle anti-social behaviour, and hire 6,500 more teachers, the economic landscape remains unclear. The Chancellor, Rachel Reeves, has signalled the need for tough fiscal decisions, stressing that "short-term pain" will be necessary for "long-term gain."
Key Economic Challenges and Fiscal Restraints
Labour's budgetary decisions are set against the backdrop of a £22 billion shortfall in unfunded spending discovered from the previous government’s plans. To address this, Labour has already cut key initiatives, such as the Conservative-proposed reforms to adult social care, saving £4 billion over the next six years. Winter fuel payments have also been restricted, saving an additional £1.5 billion annually. The government’s overall goal is to balance day-to-day spending with revenues, thereby avoiding debt accumulation while fostering economic growth.
THE FED & BOE
The U.S. Federal Reserve, in a move that feels like a financial sigh of relief, has finally cut interest rates for the first time in four years. It’s almost as if the central bankers said, “Okay, we’ve squeezed the economy hard enough, let’s give it some room to breathe.”
After years of aggressively hiking rates to fight inflation — which had skyrocketed to a level only boomers remember — they’ve now dialled it back by 50 basis points, like a chef turning the heat down from ‘burnt’ to ‘well-done.’
But wait, there’s more! The Fed’s crystal ball says another 50-basis point cut is on the horizon for this year. Wall Street initially jumped for joy at the news, only to stumble at the finish line. The S&P 500 pulled a classic move and dropped 0.29%, which is basically a stock market version of an awkward high five.
Meanwhile, across the pond, the U.K. is doing its best to pretend it’s not glancing nervously at the Fed’s moves. Historically, Britain has been happy to ride shotgun on whatever monetary joyride the U.S. embarks on.
BOE & THE FED
But this time, the Bank of England is holding steady, keeping its base rate at 5% in September, like a stubborn tea drinker insisting everything’s fine.
However, don’t get too comfortable — the market’s already betting that the BoE will cave by November 2024 and bring the rate below 5%. It’s like watching the BoE play hard-to-get with the economy.
Expect further cuts early next year, especially as Labour’s looming raids on capital gains and inheritance tax start looking like a politician with a shopping list. It’s going to take some rate cuts to make everyone feel a bit better about that!
Capital Gains and Wealth Taxes: Implications for Investors and Businesses
Labour’s potential changes to capital gains tax (CGT) will significantly affect investors, business owners, landlords, and second homeowners. While Keir Starmer ruled out applying CGT to primary residences, the threshold reduction from £3,000 could increase tax burdens on the sale of other assets. Given the recent cuts by Jeremy Hunt, raising CGT could provide a substantial revenue boost without directly targeting working-class households. However, higher CGT rates may dampen investment enthusiasm, posing a risk to overall market growth.
In the broader context, taxing capital gains more heavily may generate necessary revenues but could slow down entrepreneurial ventures and wealth creation, particularly among those in higher-income brackets who rely on investments for income diversification.
Inheritance Tax and Pensions: A Potential Wealth Redistribution Tool
Labour has also hinted at reforming inheritance tax (IHT), potentially reducing exemptions like the £500,000 threshold for homeowners passing property to children. Inheritance tax reform is seen to address intergenerational wealth inequality, although it risks alienating middle-class voters who have benefited from housing price increases. With nearly 44,000 families expected to pay IHT by 2028, changes to these rules could significantly increase the tax burden on estates, shifting more capital into government coffers.
Additionally, Labour is rumoured to be considering changes to pension taxation, including potentially introducing inheritance tax on pensions or cutting the tax-free lump sum allowance. These changes could impact pensioners' financial security and long-term savings strategies, particularly as the government attempts to find sustainable methods to support an aging population. Labour's decision to maintain the state pension triple lock could compound the fiscal challenge, as future increases in the state pension may push it above the personal tax allowance by 2028, potentially adding new tax burdens for pensioners.
Impact on Property Owners: Council Tax Reform
A possible overhaul of council tax has been floated, with Labour examining whether to adjust property tax bands to better reflect modern house values. Since council tax bands have not been updated since 1991, such a reform could see significant tax increases in high-growth areas, affecting wealthier homeowners. A proportional property tax has been suggested as a replacement, which could raise bills by an average of £1,230 for over four million households, predominantly in wealthier regions of England.
Taxation of Savings and Alcohol: Broader Economic Effects
Savings tax could also be targeted, with potential cuts to ISA allowances and personal savings thresholds. Rising interest rates mean more individuals are now exceeding their tax-free savings allowances, further increasing tax liabilities. For example, HMRC forecasts that savings tax receipts will rise to £10.3 billion in 2024-25, up from £9.3 billion last year. These changes could discourage personal savings at a time when household finances are already stretched due to inflation and high energy costs.
The alcohol industry may also face higher taxes, with Labour considering increases in alcohol duty that could generate up to £800 million. This would likely hit pubs, restaurants, and consumers, exacerbating pressures on the hospitality sector, which is still recovering from the impacts of the pandemic and inflation-driven cost increases.
Social Impacts: Education and Public Services
Labour’s pledge to remove private schools’ VAT exemption is another significant fiscal move. This 20% tax on tuition and boarding fees could raise an estimated £1.6 billion annually, but it may lead to an exodus from private education, with students potentially flooding into already overstretched state schools. If private schools pass this cost onto parents, middle- and upper-income families will likely bear the brunt, and this could increase pressure on state education services, requiring further investment in public schools.
Moreover, Labour's plan to expand public sector pay by 5.5%, costing around £9 billion annually, is another heavy fiscal commitment that may strain the budget. The government will need to manage the interplay between higher wages, inflation, and fiscal responsibility, particularly as borrowing costs rise.
Conclusion: A Delicate Balancing Act
The 2024 Labour Budget is expected to be a balancing act between meeting social promises and fiscal responsibility. Labour's ability to maintain public services, improve pay, and meet economic growth targets will depend heavily on managing tax reforms, controlling inflation, and stimulating investment. The budget will likely introduce reforms that impact wealthier individuals more significantly, particularly through taxes on capital, property, and savings, while aiming to protect the income of lower earners and key public services. Whether these measures lead to long-term economic growth or stifle investment remains to be seen.
Comments