The pre-pre-election Budget
The Chancellor of the Exchequer, Jeremy Hunt MP, presented the Government’s Spring Budget earlier this week in what was likely the penultimate chance for the ruling Conservatives to use fiscal policy to win back voters ahead of the general election.
Chancellor Hunt succeeded in his main goals: to cut National Insurance Contributions (NICs), while receiving support from the wider Conservative Party and avoiding adverse voter and market reactions (i.e. repeating the mistakes of his predecessor, Kwasi Kwarteng MP). The NICs tax cut had been heavily trailed to the media, giving markets, voters, and MPs time to digest its likely effect on inflation and growth while limiting the risk of any market or political shock.
Anticipation for an electoral surprise was higher than normal (likely indicating how bland the campaign currently is), but instead the Chancellor adopted a two pronged approach:
lay the groundwork for the Conservatives to run on a pro-growth, low-tax platform during the election later this year, and
leave as many fiscal bear traps for a potential Labour government as possible, in an effort to limit a stint in Opposition
Our broader takeaways:
Spring election more or less ruled out
The Budget did not contain any eye-catching electoral giveaways, indicating a likely Autumn election (and probably one more fiscal event)
'Fiscal headroom' became the latest scapegoat for any big changes. Inaction now might indicate a resignation to at least one term in Opposition, meaning the Conservatives are more focused on making it harder for Labour to govern rather on winning the upcoming election
Labour forced to keep its policy powder drier for longer
Hunt nicked one of Labour's few, publicly available tax rise policies: the reformation of the UK's non-dom tax status, to create a future headache for a potential Labour Chancellor. Any new Labour spending commitments will have to be re-costed, so Labour will likely continue its approach of withholding policy detail, at least until it affects their polling numbers or their business relationship optics.
Increased odds of an economic recovery that the Conservatives can tell voters 'not to risk with Labour'
The Chancellor has cut NICs twice in six months. Both cuts, which focus on workers rather than pensioners, will bolster consumption and economic growth in the second half of 2024, the same time that the Office for Budget Responsibility (OBR) predicts the UK will exit recession. The Conservatives therefore will likely run on an election platform of “don’t let Labour derail the economic recovery."
Conservatives want more time to (re)absorb Reform supporters
The real polling momentum at the moment sits with Reform. Reform is currently the UK's third largest party and hoovering up support from former Conservative voters. Expect the Conservatives to continue campaigning on immigration and cultural policy issues to try to win back these voters, at least until the economy picks up or the election truly nears, at which point the Conservatives will pivot to focus solely on Labour and issues that divide their party.
Tax cuts unlikely to narrow Labour’s wide polling lead over the Conservatives
Most polling ahead of the Budget indicated that voters care more about functional public services, rather than tax cuts. The Chancellor’s focus on tax cuts is unlikely to significantly shift the dial on Labour’s stubborn 25-point polling lead.
The government will continue to struggle to balance the priorities of its Conservative MPs, who are fundamental to the election campaign and largely want tax cuts, and the wider electorate, who prefer the government to solve problems like record long NHS waiting lists and dysfunctional mass transport.
The UK’s debt load will continue to grow
High debt interest payments will limit the ability of a future government, of whichever party, to fund public services and offer a tax-friendly business environment. Neither political party is likely to offer a long-term solution to this problem during an election year.
If Labour comes to power, they will likely raise taxes and spending, while the Conservatives may opt for further tax giveaways and spending cuts ahead of the election to increase their odds of victory and limit their time in Opposition, respectively. Both will amplify the UK’s structural debt problem, increasingly problematic during a time of war in Ukraine, conflict in the Middle East, and a potential second Trump presidency.