07 Mar 2024 4 min read

UK budget – no surprises and no alarms

By James Carrick

We believe the budget could support growth and reduce headline inflation this year, with the government talking a good story about future restraint and supply-side reforms. Could another 'giveaway' beckon in the autumn?


Key takeaways: 

  • No surprises in a well-briefed budget. Net tax cuts could boost growth and reduce headline inflation this year 
  • No alarms? The Office for Budget Responsibility (OBR) questions whether future tax hikes and spending restraints will be delivered. But the supply-side reforms and digitisation to boost public-sector productivity are encouraging, in our view
  • Over-optimistic? However, we think the OBR could be too optimistic on the scope for the economy to deliver above-trend growth in the coming years
  • Political cycle: The rolling nature of fiscal rules means another ‘giveaway’ budget this autumn could make sense politically with an election on the horizon

When I worked at HM Treasury, the goal was to make macroeconomics boring. High fives at 11 Downing Street then, as there was little surprising in the budget speech given how well briefed it was.

What about alarms? (Hopefully you get the Radiohead reference). We can nit-pick some of the assumptions (see below) but the Treasury is ‘talking the talk’ of responsibility: stabilising debt-to-GDP, boosting the supply side (lower marginal tax rates for labour participation and broader allowances for business investment), digitisation to boost public sector productivity and lowering headline inflation through duty freezes.

The walking will have to be done after the next election when fuel duty is finally set to be increased, public spending per capita squeezed and fiscal drag continues.

On personal taxes, the government is giving with one hand today while taking back with the other over several years. This is illustrated by a wonderful pair of charts from the Resolution Foundation:



This year, there’s a substantial boost to household incomes from national insurance rate cuts. This will support consensus optimism of a recovery.

But by the 2027/28 fiscal year the impact is more neutral as freezes in tax thresholds increase the effective tax rate people pay as their wages rise.

This is classic political business cycle. Goodies before the election (due by next January), tightening afterwards. In this vein, it could make political sense to deliver another giveaway budget this autumn before calling the election.

Not only would this allow time for stronger household real incomes to boost political support, but the key fiscal rule (lower debt as a share of GDP) is not binding for a particular year, but between year four and year five ahead.

In the autumn, the forecasts will be extended to the 2029 fiscal year. Another year of frozen tax thresholds and spending restraint could free up another £11bn, which could be enough for another headline grabbing penny or two off national insurance rates.

Debt would be higher throughout the forecast period but still set to decline at the end of the moving target.


The big picture is that promised fiscal restraint prevents debt from exploding.

The OBR caveats that chancellors have ducked raising fuel duty for over a decade, non-protected departments might be squeezed too hard and previous governments have had to top up medium-term spending reviews by £35bn.

The OBR also notes that its growth forecasts are more optimistic than consensus and the Bank of England (BoE). It believes the economy is currently operating at potential but a modest recovery this year will open up a ‘negative output gap’, allowing for above-trend catch up thereafter.

However, with recruitment difficulties remaining elevated, the risks are we’re still operating above full capacity and there is little scope for above-trend growth in coming years.


On the positive side, the fuel and alcohol duty freezes could knock about 0.2% off the BoE’s inflation forecasts, making it more likely we get an annual inflation figure that starts with a psychologically important ‘1’ (i.e. 1.9% or less). This could anchor inflation expectations and make it more likely we get normal price and wage setting behaviour in 2025.

In short, we believe the budget supports growth overall and could lower headline inflation this year. While we can nit-pick the assumptions, the government is talking a good story about future restraint and supply-side reforms. Another ‘giveaway’ could beckon in the autumn.

James Carrick

Global economist

James is a global economist with a knack for using analogies to explain economic concepts. He is a techno-optimist and an early adopter. He enjoys building models - both of the economy and robot Lego ones with his son. He also likes crunching data and chocolate bars. He joined in 2006 from the number-one ranked economics team at ABN AMRO with prior experience at HM Treasury.

James Carrick