2024 Budget Update

Some thoughts from me on the budget last week.

On Wednesday the Chancellor of the Exchequer announced a wide sweeping budget that will have a profound impact on the UK economy for the next several years. While the impact of this budget had been widely leaked in the press, the reality of the budget has yet to fully be reflected. As of late Friday, the market was still digesting the impact of the UK budget - however, there was a weakening of the pound and an increase in the risk premium (cost) of UK debt. Whenever changes on this scale are made there are many unintended consequences which have yet to be fully anticipated. Examples of unintended consequences are the effect of the budget (employer national insurance increases) on GP surgeries, end-of-life hospices and nurseries amongst others.

For more details on how the budget will impact you, a 25-page analysis from our partners at Technical Connection is available. If you would like more information on this please contact me. Technical documents are not meant to be a substitute for professional advice but rather to signpost areas that might impact you that warrant further discussion.

The losers from this budget are family businesses, employers, retirees & beneficiaries – pension death benefits, farmers (passing down of family farms), new business and investors, foreign investors (“non-doms”) high-net-worth individuals operating in the UK, second homeowners and those educating their children in private schools. If the Government certainly wanted to charge up groups of the electorate, I am not sure picking retirees, farmers, parents privately educating their children and employers would be my first choice. Let’s not forget that many pensioners are still reeling over the withdrawal of the winter fuel allowance. Taking on any of these constituencies alone is a big challenge and taking them on simultaneously is certainly very brave.

You may ask who are the winners? Other than if you are a public sector employee, I think the answer to that question is yet to be determined. The UK government does not have a good track record of building new things: HS2 and the NHS are just two examples of projects that have gone off the rails. Although the Chancellor has stated that she will not need to raise taxes again in this parliament, financial markets are still very sceptical especially if there is no public sector and welfare reform.

Looking over the data, I was surprised to read the following:

• The Office of Budget Responsibility now projects that this year’s borrowing will total £127.5bn, £40.3bn (46%) higher than its March 2024 estimate.

• In 2019, net debt servicing was £38.2 billion and the net cost of servicing the UK government’s debt is projected to be £104.9bn in 2024/25 and a similar amount in 2025/26. The UK debt interest bill will continue to rise to £122.2bn by 2029/30. To put that in perspective, in 2023 the UK spent £54.2 billion on defence.

• In 2024, total public sector employment in the UK is now approaching 5.94 million employees. Before Covid, at the beginning of 2020, it was 5.47 million. So, since COVID, public sector employment has risen approximately 10%.

From a Financial Planning standpoint, perhaps the two most disappointing policies this Government has chosen to introduce are an inheritance tax charge (“IHT”) on pension death benefits from 2027/28 and changes to inheritance relief on business property means intergenerational family firms passing on assets of more than £1 million will be charged 20 per cent tax from April 2026. There has been much media focus and some are dubbing the “tractor tax” on a 20 per cent tax on family farms over £1 million overshadowing business property relief.

Pensions are a long-term savings vehicle and continued government tinkering is damaging. People are living longer. The UK already has a very low savings rate of around 9 per cent compared to France or Luxembourg around 18 per cent. A good example of an unintended consequence was Gordon Brown’s raid on dividends paid to pensions which had a profound effect on the structure of UK capital markets. If you have ever wondered why UK pension funds do not invest in UK equities this article is a good explainer.

IHT on business property has very large implications for organic growth in the UK economy. Sir James Dyson, the entrepreneur, wrote in The Times: “Rachel Reeves is killing off established family businesses, and any incentive to start new ones, with her 20 per cent Family Death Tax, levied each time a family business passes a generation.”  Sir James has also stated that the Budget was “spiteful”. This policy does seem misplaced since the Government is trying to attract foreign investment to the UK while simultaneously killing off domestic businesses by making continuity more expensive.

I have had a few discussions on whether this budget has presented any good buying opportunities or whether portfolios should be changed. One note from one of our investment managers which I agree with is that UK equities, debt and sterling don’t present any opportunities at the moment. The US on the other hand is worth watching considering recent wobbles in tech. The US jobs report on Friday revealed that only 12,000 new jobs were added in October which was down from 223,000 in September. Normally such a low number would have caused havoc in the market but remarkably US markets were up on the day largely because the market is still digesting the effect of the US hurricane season, particularly, Milton and the US election. If you will be following the US election this is a fun outcome simulation.

Should you wish to have a further discussion with me concerning your financial situation concerning pensions, investments, mortgages and insurance please do not hesitate to get in touch.

The contents of this letter and attachments should not be relied upon for any regulated financial advice. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.