Supplement 10 Mar 24 – Damp Squib Budget?

Mar 10, 2024

“Damp squib Budget will be remembered as a Chancellor signing his party’s death warrant” – Kevin Maguire, Associate Editor – Daily Mirror

Before we begin – Rod Turner and I ran a Property Business Workshop in January in London. We covered a wide range of topics – all the way from what a great investment looks like, to how to operate more than one company, why you would do that, how you might structure it, all the way down to a whole host of productivity hacks and general “January fitness” activities for your business(es). We enjoyed it, got some great feedback, and met some great people too. We are going to run another one with fresh content including due diligence (both on business partners and with a view to lending money), joint ventures, mergers and acquisitions and some accompanying case studies on some easy (and more complex) deals that we’ve done. The tickets for the next one are here – the date for that one is Wednesday 24th April, and there’s a discount for the early birds that’s ending during the week coming so don’t be shy………


So there was a bit of a ramp around the budget. Near hysteria. The Telegraph nearly blew up in trying to get a stubborn Jeremy Hunt to cut all sorts of taxes. The last roll of the dice, I’m sure they felt, in getting Hunt to abolish or stamp out inheritance tax, due to the proclivities of the (likely) incoming administration. In fact, I’d wager that the average UK house price will be above the inheritance tax threshold before the £325k is changed (although, of course, if you own a house you do get an extra £175k as a person or £350k if you were ever part of a couple, so that’s an unfair yardstick). That £325k number has been there since 2007, although the band associated with housing ownership was only phased in in the 17/18 tax year. At least another parliament before there’s another change there, and with wealth inequality growing, it will take a Liz-Truss led Tory resurgence – or equivalent (surely not. Surely never. Please) – to cut this tax rather than letting inflation work its magic.


Politics these days leaks everything, so there are no leaks any more. In fact the news would be “this policy WASN’T leaked” – that’s the preferred route now. Understandable I suppose. Minimises u-turns (Note – minimises. Not eliminates). I’ll get into the budget highlights (that won’t take long), the property-related consequences, and the summaries of the budget from two different schools of thought in due course this week. I’ll also tuck into the Office for the Bloody Ridiculous (OBR) and their forecasts, at least one of which is indisputably already in the toilet, even though they’ve just revised it. Fools! I will first, however, kick off properly with the macro scoreboard. 


The week was somewhat devoid of macro events (exactly why the budget is timed in the week that it was). I can still choose a big 4, however – the retail sales monitor, the purchasing managers’ indices, the Halifax House Price Index, and (you know it), the 5-year bond and swap yields. 


Retail sales have been anaemic for years. A big boost in the throes of lockdowns, and then haircuts ever since as that glut of goods people bought has worked its way through eBay and similar thrift outlets. There has been an element of nominal growth, which inflation and particularly spiralling wage costs has fueled. Growth in name only, shrinkage after inflation applied. A beleaguered sector no doubt, which tends to see consolidation, merger and acquisition, and a few cash cow businesses fighting the good fight on an ongoing basis (keeps Mike Ashley in beers, anyway). The year on year is forward by a mighty 1%, so 3% down in real terms or thereabouts, and below the consensus forecasts. Another little indicator that consumption has really cooled and the very largest component of GDP is looking wobbly. We may well not power out of this recession but limp out, at this rate…..


The PMIs. My favourite indicator of them all for timeliness and accuracy. Services for Feb was revised down to 53.8 – the flash forecast was 54.3, and this was a surprise to the downside – but north of 53 is still very healthy indeed. Services look good. Construction was different, up to 49.7 which was well above consensus of 49, but still marginally negative. A tiny bit of shrinkage. Construction battles on and let’s see what the spring brings as headlines start to tell a tale of a rising market.


On the subject of said rising market, Halifax weighed in with their best efforts to continue defeating their own predictions. February is their fifth “up” month in a row, in spite of their gloomy 2024 forecast of -4%. Only 0.4% up, and only 1.7% up on the year – so, just like retail, down in real terms but it does make you wonder if they even read their own data before they make predictions. These were a cooling on January’s numbers (Jan had a lot of relatively cheap money before yields hardened again – and also had a “bounce” on the back of a weak H2 of 2023 of course) but we’d all rather that slow and steady win the race I’m sure. Halifax currently just over 1.6% for 2024 alone, so 5.6% away from their forecast. They better hurry up with those down months, eh? Needs to average -0.5% monthly from hereon in – best of luck with that, Halifax.


That takes us to the bond yields, and we opened higher at 4.01%, to close under the magic number again at 3.907%. The product teams at lenders must be celebrating these typical bond market weeks which are, frankly, as dull as ditchwater. The budget dropped yields by perhaps 10 basis points, and I’m not sure why (I’d see it as more inflationary, and will get into that analysis) but then as everything had already been leaked, that may have already been priced in and the feeling was still that the hand is OK on the tiller and the Bank of England will hold hard on rates as long as they need to. The swaps closed Thursday’s market at 3.877%, still trading under, still indicating suppressed mortgage demand. The market feels as though it will “stall forward” to me right now, in the figures for March when they do come out – although this is subject to change week-on-week if the volatility picks back up, of course. 


This sees the current “no-fee” rate at Paragon – 5.94% – look well priced. If you can beat the total cost of debt on this mortgage (and you have the luxury from a cashflow perspective of even considering a 5.94% mortgage at 75% – I know many won’t) – then you should be laughing, that’s as good as it gets right now. I saw better products this week in the low 5s with 2% fees that fitted one particular remortgage that we were doing in a better way (from a total cost of debt perspective).


So, that’s the macro. Onto the budget. The property-specific elements first, as this is a long one (but not this part):


3 changes of note, specifically property-specific:


I) The removal of Multiple Dwellings Relief – MDR. I’ve seen all sorts of analysis about this since Wednesday, and I’m afraid most of it is wrong. Remember, we don’t have the complete details on the day, but on the current reading of it:

  1. Transactions of between 2 and 5 properties that are “linked” – the definition is long but in typical HMRC style, it is “catch-all”. If the vendor is the same person, linked, related, business partners or the hairdresser’s dog, the transactions are linked in spite of any time period between them. Doing 5 sets of legals for 5 properties won’t get around this
  2. The nuance here that 6+ properties can still opt for the non-residential rate of SDLT is correct. However, pretending “this doesn’t make much difference is wrong”.


Here are two examples to illustrate what I am saying – 2 that look very similar to 2 that I’ve done in real life:


  1. Portfolio (or block of flats – also works until June when this rule kicks in) – unit cost under 40k per unit. Minimum rate of MDR applied – 1%. 550k purchase, 17 units, 32.5k ish per unit (flat) –  SDLT 1% because 3% wasn’t payable and so it defaulted to 1%. After June – 3% up to 250k and 8% beyond 250k on that transaction (in reality commercial rate would “work” but still be 17k now, rather than 5.5k. (the “new resi” world would be 31.5k for comparison. Every extra £ in purchase price yields 4% more stamp duty than before in this scenario. 
  2. Portfolio (again flats OK as long as properly self-contained) – unit cost ABOVE 40k per unit (but under 250k per unit). 3% now applies as MDR minimum on the whole transaction. 10 properties, same vendor, average pricing 65k per unit – we paid 3% on 650k i.e. 19.5k on this one using MDR, instead under “new resi” it would have been 39.5k instead (commercial rate here, which would be used instead would be 22k, so not overly painful, but as you approach bigger numbers the differences soon get very large. Every extra £ in purchase price yields 2% more stamp duty than before in this scenario.


Ask a trader how that works in the real world. Exiting landlords just get kicked harder because the price of entry for the trader just went up. Bit of a blow to those waiting to sell it is fair to say! I am not sure the Treasury understand this at all, because the long game here is hoping that portfolio landlords dispose to institutions, and an extra 1% out of the whole transaction (the important concept to grasp is that of that marginal percentage – 2-4% rise in stamp duty for portfolio purchasers, which has to come from somewhere). 

The limited company disposal becomes ever more attractive, and thus the “incorporate and sell shares route” becomes more attractive, although to say that isn’t a fast option is an understatement, so if anyone is selling with any element of time pressure, that’s off the table, and the treasury has taken 2% (most likely, unless the landlord is disposing of a portfolio of particularly cheap flats) more out of that transaction. Even if split 1% each (and as I said above, ask a trader how that works in the real world), the difference is already at the margin for purchasers with rates where they are currently. I don’t get it – I have seen sparing examples of the abuse of MDR over the years (incredibly rare but a ridiculous example – selling flat in Mayfair, also have buy-to-let in Timbuktu which I can sell for 30k, and so the Mayfair purchase comes right down the stamp duty bands) – but the Government have stated “MDR doesn’t raise any extra revenue” – how would they know? Nevertheless, no point in arguing – it’s done.


II) The removal of the Furnished Holiday Lettings tax regime. An easy one for the Government and a real potential win-win for them. More tax, fewer incentives to go to SA to get around section 24, more homes back in the PRS as a result. More new hotels too – more council tax and business rates £££ and planning fees! A blow to SA (unless already using limited companies of course) – or is it?


The reality is, that’s one more disincentive or barrier to entry, of sorts. A reason NOT to do SA. If newer units are harder to come by, you are potentially advantaged by already operating within the sector of course…….with planning changes promised/coming/surely soon getting shelved as even the Renters’ reform bill is under pressure not to happen from backbench rebels, and the RRB is definitely the property policy piece of priority – and there’s still leasehold reform to consider. Surely changes to short term rentals are less important than those two, and also politically much more likely to have some impact?


III) Oh Jeremy. CGT down from 28% to 24%. A little piece of evidence the ruling party is still on the side of the landlord (ha ha). Here’s the exact wording from the Government website:

“reducing Capital Gains Tax on residential properties to raise revenue and boost the availability of housing by encouraging residential disposals”


I think we need a reality check here. This is just so tone deaf as to the current flavour of the residential property market. The discriminatory rate for property was a sneaky way of punishing long term holders of property anyway – but encouraging disposals when there’s a shortage of rental stock in the country as there currently is? Encourage the exit door? I don’t think even 10 seconds thought has been given to the plight of the tenant here. That breach of the psychological barrier of 25% WILL encourage some disposals, I’m sure, in an environment where landlords really don’t need much excuse to sell. 


The narrative also fits in – lower tax, higher tax take – the traditional Conservative mantra which certainly can yield fruit – but the complete opposite of what they’ve been doing for years with Corporation tax (for example). Hmmmm. A strange throwback to the old days, is all I can say here. This one does kill some of the pain of I) though, let’s face it! 


So perhaps that does work in a way that makes some sense, when put together. Small beer to the Treasury – we are talking less than a £billion, when the first two are combined, and then no figures on how III) will operate but that’s a low hundreds of millions conversation in my opinion, perhaps less than £100m – it is also a “one-off” shot in the arm rather than an annual one, in my view. Perhaps a net (minor) positive to the Treasury without too many negative impacts – if anything, less stock helps landlords who remain in the game. No disaster, and nothing to get too twisted about. 


I’m going to crack on now with the OBR, because – remember – the fiscal rules state that the chancellor needs to start here before building a budget. A “quick” (haha) line-by-line of the executive summary is in order, because we need to see what the forecasts are saying. No mention of just how miserably ridiculous they’ve been in the past 18 months of forecasting – but then only the really successful look back at their losses and analyse them, let’s face it. Here we go: 



1.1 The UK economy has emerged from the twin global shocks of the pandemic and Russian invasion of Ukraine into a period of declining inflation but stagnating output. Stagflation, you heard it here first in the Supplement, some time back now! Inflation has receded more quickly than we expected in November and markets now expect a sharper decline in interest rates. They got it consistently wrong, first it was transitory, then it was going to be this terrible recession-causing beast – pendulum swung too far. This strengthens near-term growth prospects and should enable a faster recovery in living standards from last financial year’s record decline. Not clear which metric they are using here but as discussed before, the top was Q3 ‘21 in Real Household disposable Income and the bottom was after Q3 ‘22. ‘23 was improving but from a bottom, so I’m not sure how they’ve measured this. But the medium-term economic outlook remains challenging. One of the biggest changes to our economy forecast is an increase in the size and growth of the UK population. Makes sense – the net migration figures caught everyone apart from migration watch on the hop. But higher and rising levels of inactivity offset its impact on the overall size of the workforce, leaving our forecast for the level of GDP in five years virtually unchanged from the autumn, and the level of GDP per person slightly lower. I’ve talked about this a few times recently – lower participation, but also fewer hours – still needs reversing. 

1.2 The overall outlook for the public finances is also similar to November. Lower inflation and interest rates reduce the Government’s projected debt servicing and welfare costs, but they also reduce revenues. Because, with frozen tax thresholds, inflation means more tax take. The current forecasts now look a bit low though, to me, if we follow a similar path to the US economy and with services inflation still as high as it is, there’s no guarantee their forecast is now correct. These pre-measures forecast changes result in a £20 billion fiscal improvement over the next two years but leave borrowing largely unchanged in five years’ time. The Budget announces a package of net tax cuts, including a further 2p cut to the main rates of employee and self-employed national insurance contributions, the cost of which is partially recouped by tax rises in later years. This has been quoted elsewhere as giving £1 now to return £1.90 by 2027, so “good business” by the Government. Borrowing is still projected to fall in each of the next five years thanks to tax as a share of GDP rising to near to a post-war high, debt interest costs falling, and per person spending on public services being held flat in real terms. It’s unpopular but also factual – in times of inflation above target, keeping tax high is a good idea, as it combats inflation. Debt interest costs falling though – not sure about this. Remember I’m in the camp of thinking interest rate cuts will be slower than most are expecting, and so the actual costs of borrowing will be rising for some time yet for the same reason that the overall average mortgage rate that people are paying is climbing at the moment. Bonds that were issued since 2009, that have recently matured, are all being rolled over at higher rates, not lower. This is just enough to meet the Government’s fiscal rules on our central forecast with underlying debt falling as a share of GDP in 2028-29 by a historically modest margin of £8.9 billion. It’s tight, Jeremy Hunt has used all the ammo we would allow him, is what this sentence basically says. 

1.3 This margin is a small fraction of the risks around that central forecast. Inflation could rebound and remain higher for longer if the conflict in the Middle East were to widen or if domestic wage pressures do not subside as quickly as we assume. The latter of these looks quite likely. There is also uncertainty around several key drivers of medium-term economic growth including net migration, labour market participation, and productivity growth. The fiscal forecast is highly sensitive to movements in interest rates which have been unusually volatile recently. (and that they’ve predicted particularly badly, thanks to their inflation forecasts being particularly bad). Since November, market expectations for medium-term Bank Rate have been both 1 percentage point higher but also ½ a percentage point lower than assumed in this forecast. The fiscal forecast is also conditioned on the tax take rising to near record highs, including through planned rises in fuel duty that have not, in practice, been implemented since 2011. It also assumes the Government will stick to assumptions which imply no real growth in public spending per person over the next five years, despite committing to increase spending on some major public services in line with or faster than GDP. This is the “poison pill” piece of Jeremy Hunt’s portfolio of work. VERY difficult to achieve. 

Economic outlook

1.4 CPI inflation was 4.2 per cent in the final quarter of last year, 0.6 percentage points lower than we forecast in November. We now expect it to fall further to an average of 2.2 per cent this year and 1.5 per cent in 2025 before gradually returning to target at the end of the forecast period. Two months in. One month of figures in. 4%. Last month I’d suspect a small fall but I don’t agree with our average this year getting down to 2.2%. I think the average inflation rate for 2024 will start with a 3. That affects later forecasts too of course. I think we trend downwards to April then bounce back a bit again from a 2.x% print in April for CPI. Our lower central forecast for inflation is partly driven by larger anticipated falls in global energy prices. Well, most of these have already happened, but it’s unclear how much they are pricing in. We also expect domestically generated inflation to be weaker, as falling energy prices pass through into lower economy-wide costs and the labour market continues to loosen. I think that particularly the second point is relevant but really, as above, a lot comes down to consumption which HAS started to weaken. Our central forecast assumes current disruptions in the Red Sea make only a small (0.2 percentage points) upward contribution to inflation. But we also consider the risks of a widening conflict in the Middle East, through a scenario in which a sharp rise in energy prices causes inflation to spike back up to an annual peak of almost 6 per cent. That all seems pretty fair. 

1.5 Alongside easing inflationary pressures, market participants now expect a sharper fall in interest rates than in the autumn. Bank Rate is expected to fall more steeply this year from its current peak of 5.25 per cent to 4.2 per cent in the final quarter of 2024. I’m above this and I think rates at the end of this year look more like 4.5% or even 4.75%. This is based on stronger inflation, and the fact we should have been at 5.5% rather than 5.25% anyway. In the medium term, Bank Rate falls further to 3.3 per cent, almost ¾ of a percentage point lower than in our November forecast. With gilt yields also around ½ a percentage point lower across maturities, the cost of debt interest for the Government is significantly lower than expected in November. But expectations remain volatile, as shown by expectations for Bank Rate in 2028 oscillating between 2.7 and 4.2 per cent since our November forecast. I’d be on the lower end in 2028, from here, but it is very speculative going that far out at this point. The medium term 3.25% or so doesn’t look too ambitious, but feels like the lower end of a forecast. 

1.6 There has been important news since November about the size and projected growth of the UK population. Based on updated outturn data and January ONS population projections, we now expect the total UK adult population to rise from 55 million in 2023 to 57 million by the end of the forecast, 1¾ per cent larger (or 1 million more people) than in November. About two thirds of this increase is due to a higher estimate of the current UK population, which takes account of the 2021 Census and net migration since then, with the remainder largely from higher net migration over the forecast. All this looks likely. Whilst more stay out of the workforce with covid after-effects which are numerous, net migration stays strong in my view. Having reached a record high of 745,000 in 2022, net migration stood at 670,000 in the year to mid-2023, around 70,000 higher than assumed in our November forecast. Supported by the policy measures announced since our last forecast, our central forecast assumes annual net migration falls back to 315,000 in the medium term, up from 245,000 in our November forecast. I think they have under-egged the other drivers of climate change, and geopolitical uncertainty. I also don’t imagine a Labour administration being hostile on migration, and overt hostility has STILL led to the largest numbers we have ever seen by some way. We also explore scenarios in which annual net migration is around 200,000 higher or lower, which could raise or lower the level of GDP in 2028-29 by around 1½ per cent but would have a small impact of uncertain direction on GDP per person. GDP per cap > GDP in terms of a yardstick, but not a patch on RHDI which I still can’t understand being omitted from the data stack here. 

1.7 The latest data also suggest that the post-pandemic rise in economic inactivity is likely to prove more persistent than we previously thought. The number of inactive working-age adults is no longer declining from its post-pandemic peak, as previous data suggested, and has instead rebounded to 9.3 million. This keeps it around its highest level in over a decade and 700,000 more than before the pandemic. Around one third of the working-age inactive population cite long-term illness as their principal reason for not being in the labour force. We estimate that the policies on childcare expansion, welfare reform, and personal tax cuts announced over the past three fiscal events will increase total labour supply by over 300,000 people in full-time equivalent terms. But the ongoing ‘fiscal drag’ from frozen personal tax thresholds will also weigh on work incentives, offsetting over a third of this rise for an overall change of close to 200,000. But after taking account of all of the factors discussed above, we now expect the labour participation rate to continue falling from its pre-pandemic quarterly peak of 64.3 per cent to 62.8 per cent by 2028, 0.5 percentage points below our November forecast. This is different from the ONS measurement because it considers 16+ citizens rather than those in the 16-65 bracket that the ONS measure. This is a significant assumption that the trend will go on – not congruent with what we’ve seen in other countries – austerity under most guises will turn the screw on this one way or another but will that be Labour’s goal – or even unintended consequence?

1.8 With a larger population but lower labour participation, our forecast for potential output growth over the next five years is largely unchanged from November at around 1⅔ per cent a year. Higher net migration, lower interest rates, and lower energy prices boost population growth, business investment, and productivity respectively. But the latest data on labour participation, demographic and other factors have led us to revise down the overall trend participation rate and average hours worked. The net effect of these changes leaves the level of output 0.1 per cent lower in 2028 than forecast in November, but 0.1 per cent higher after accounting for the policies in this Budget that boost labour supply. Let’s see on these trends. The trend is your friend but not at the end……

1.9 The profile of output is slightly weaker in the near term but slightly stronger in the latter part of the decade. GDP grew by only 0.1 per cent in 2023, undershooting our November forecast by 0.4 percentage points. But we expect output growth to pick up to 0.8 per cent in 2024 as interest rates fall and real household incomes recover. GDP growth picks up to around 2 per cent in the middle of the decade as slack in the economy is taken up, before falling back towards its assumed trend rate of around 1⅔ per cent by 2028. These forecasts often work like this. If there is less in the short term then there’s more in the medium term. I’m not convinced that history bears this out, but since they only look one forecast backwards and never openly talk about what a poor quality job they’ve done in recent years, what do you expect? Policies announced in this Spring Budget provide a small temporary boost to demand in the near term and to supply in the medium term which raises the level of real GDP by 0.2 per cent in 2028-29. Risks to our medium-term real GDP forecast remain elevated. The outlook for productivity growth is our most important and uncertain forecast judgement, and there is significant uncertainty over both our migration and participation forecasts. I’ve said it before – Hunt has done a brilliant job within the framework he’s been given. He’s been dealt a terrible hand and also the overall framework, forecasts and assumptions have been wrong, and sometimes miles out. So the result is never going to be optimal!

1.10 Having steadily declined since early 2022, real GDP per person is forecast to trough at 1¼ per cent below its pre-pandemic peak in the first half of 2024. Still the wrong measure – RHDI…..half the time I wonder if the OBR comes up with its own measurements rather than use ONS ones simply to justify their existence……tin foil hat comment of the week. Persistent weakness in per person output has been driven by rises in inactivity and subdued productivity growth, which has remained well below its pre-financial crisis average in recent years, even after accounting for the rebound from the pandemic. We expect real GDP per person to begin to recover later this year and regain its pre-pandemic level in 2025. Real GDP per person increases to around 4½ per cent above its pre-pandemic peak by the forecast horizon, but remains around ¾ of a per cent lower than we forecast in November. Productivity growth in a year where minimum wage costs go up 11.5%+ but inflation gets back to 2.2% average as well apparently? Can’t happen IMO, or at least not without a prolonged recession, which ISN’T in the forecast. 

1.11 The recovery in output is largely driven by a pick-up in household consumption growth to around 2 per cent from 2025 to 2028. Unlikely to have a recession in those circumstances. That growth is stronger than in November due to higher household disposable incomes (finally noted!), a sharper slowdown in inflation, and lower interest rates. In contrast, business investment is expected to contract by around 5 per cent this year as past increases in interest rates raise the cost of capital and weigh on capital spending (a shame if that does happen, higher than other forecasted figures – I don’t have enough data to have a view here). Investment then strengthens as interest rates fall and demand picks up. Recent trade data have been volatile and subject to large revisions. Nevertheless, we forecast that trade volumes will continue to be subdued in the next few years due to sluggish growth in the UK and global economies, and the evolving impact of Brexit (I’m not sure that will be the case globally, or be much to do with Brexit at this point). From 2024 to 2028, we expect export and import volumes to average growth of 0.3 per cent and 0.1 per cent a year, respectively. As a result, net trade makes a negligible contribution to growth over the forecast period. It is a small point anyway in the scheme of things. 

1.12 Weak near-term GDP growth drives a modest rise in the unemployment rate in 2024, which then falls back as the recovery gathers pace. The latest ONS data suggest that unemployment fell to 3.8 per cent in the fourth quarter of 2023. In contrast, claimant count data measuring the number of people on unemployment benefits has remained flat in recent months, while the redundancy rate has been on a slow upwards trend since the middle of 2022. We therefore judge that this and wider evidence is consistent with a moderate rise in the unemployment rate, peaking at 4.5 per cent in the last quarter of 2024, in line with our forecast for subdued economic growth and increasing spare capacity in the economy. The peak in unemployment of around 1.6 million people is marginally lower (by about 40,000 people) than in our November forecast, though it comes half a year sooner. This is a much more realistic unemployment forecast than any of the recent ones. The unemployment rate is then forecast to decline to its estimated structural level of 4.1 per cent by 2028. Great for the economy if it stays around there. 

1.13 From a thirty-year high of close to 7 per cent, we expect nominal average pay growth to halve in 2024 as inflation falls and the labour market loosens. This is way too hopeful in my view, the 9.8% min wage, 8.5% pension and 6.7% benefits, whilst backwards looking, are much more likely to set the scene. I think more like 4.5 – 5% still by the end of 2024 down from 6.2% in Dec 2023. 25% down, not halved. Again a longer inflation half-life than predicted here. Nominal earnings growth is slightly weaker than our November forecast as inflation is less persistent. In terms of total labour income, this weaker nominal earnings growth is partly offset by faster growth in the number of employees. That leaves the level of nominal wages and salaries, a key determinant of our fiscal forecast, 0.3 per cent lower at the forecast horizon than in November. This is broadly in line with our revision to nominal GDP.

1.14 Living standards are expected to recover more quickly than we forecast in November and grow by around 1 per cent a year on average over the forecast. 2022-23 remains the fiscal year with the largest year-on-year drop in living standards since ONS records began in the 1950s. But we now forecast real household disposable income per person to recover its pre-pandemic peak by 2025-26, two years earlier than in our November forecast. I just don’t understand this. RHDI at the ONS has ALREADY RECOVERED to those levels and is past them. I’m sure there is a technical difference somewhere but I wish they took time to explain where! The faster recovery in living standards arises because the negative terms of trade shock brought about by the rise in the price of imported energy has unwound more quickly and fully than expected. Policies in this Budget provide an additional boost to household incomes, with the further reduction in the main rates of national insurance contributions alone providing a direct boost of ½ a per cent. We’ve got a good runway over the next 6 months in energy prices as long as we aren’t knocked off our perch by geopolitical escalation, most likely in the Middle East.

1.15 Nominal GDP is forecast to grow by an average of 3.3 per cent a year over the forecast period, slightly less than expected in November due to the lower inflation outlook. The slower growth in the GDP deflator, combined with a little-changed path for real GDP, leaves the level of nominal GDP 0.3 per cent lower in the medium term than in our last forecast. Nominal GDP has done a lot better than this to keep pace, or near-pace, with inflation. This sudden slowdown is of course linked to inflation, and it will be no surprise that my position, more inflation than this forecast, is therefore linked to higher Nominal GDP growth than this forecast indicates. In terms of the other key nominal tax bases, both profit and nominal consumption growth are weaker in the near term but rise faster in the medium term. By the forecast horizon, the change in both tax bases is broadly in line with that of nominal GDP. Which makes sense.

I’m stopping the line-by-line here because that’s the end of the overview and all of the Economic outlook. It’s only about halfway through and the rest is much more macro and less relevant to readers and listeners. I’m just going to select a couple of relevant points and comment on them.

1.19 The Budget measures with the largest estimated direct fiscal impact are:

  • a further reduction in rates of national insurance contributions (NICs), including a 2p cut in the main rate of employee and self-employed NICs from April 2024, which costs £10.7 billion by 2028-29; (and which is inflationary, realistically, we should note – because putting £££ in the pockets of the lower paid workers will tend to boost consumption – although arguably consumption could do with a bit of a boost at this time, inflation is coming from elsewhere – the balance is very difficult to determine)
  • reform of the current non-domicile regime from April 2025, which raises £3.1 billion on average from 2026-27 to 2028-29; (The OBR remain apolitical, but Hunt stealing this policy from Labour and doing it in a “Conservative way” is typical. I was disappointed the VAT on goods for those visiting wasn’t addressed as it seems to be costing the UK both tax and revenue from overseas visitors, which is a bit silly.
  • a number of new taxes and other revenue raising measures, including the introduction of vaping duty and the carbon border adjustment mechanism, HMRC anti-avoidance and compliance measures, and a one-year extension to the energy profits levy, which collectively raise £3.9 billion by 2028-29; Let’s face it – vaping should have been taxed years ago. I’m always stunned about how slow Governments are on the uptake in these situations. Tobacco duty will need replacement and getting it from vapes is the logical next step – and
  • £0.9 billion more departmental capital spending per year on average between 2025-26 and 2027-28 on a public sector productivity programme focused on the NHS, and £0.8 billion per year less departmental resource spending from 2025-26 onwards. A small net benefit – the one shred of hope here, because this is only old policies rehashed one more time – is that Artificial Intelligence can make a difference. The larger the organisation, generally, the older and creakier the infrastructure – especially in the public sector – so the savings WILL be there to be made, but will they be found and implemented in the timeframe, with the appropriate vigour? I’m sure the consulting firms will be rubbing their hands at this bit though.

Performance against the Government’s fiscal targets

1.25 The Government’s primary fiscal target is for public sector net debt excluding the Bank of England to fall in the fifth, and final, year of the forecast. In our central forecast, this rule is met by a margin of £8.9 billion (0.3 per cent of GDP), down from the £13.0 billion (0.4 per cent of GDP) margin in our November forecast. As the pre-measures forecast is broadly unchanged by 2028-29, the reduction in headroom is mostly due to the impact of policy measures. Hmmm. Suspiciously like the way the Bank of England works, isn’t it. No – the debt isn’t out of control, because it is being paid back by the end of our forecast in 5 years time. Who holds us to account if the forecast is wrong? No-one. The Bank uses 3 years – why do the OBR get 5? Arbitrary. No-one asks these questions. 5 years is the length of term of a parliament (apparently, although only when the incumbents are hanging on by their fingernails now the fixed term act has been repealed). You could argue the other way quite vociferously as well – 5 years isn’t long enough to sort out the pandemic impact, nor is it long enough to measure long-term effects of infrastructure projects which we should at least consider borrowing to fund because they will have positive net present value and positive societal value, help with levelling up, and increase tax take over time. This is more the Andy Haldane viewpoint, and I’m more inclined to agree with this side because I am much more of a long-term thinker than I am a short-term one!

One more – last one from the OBR report, promise…..

Risks and uncertainties

1.28 Historically large changes in energy prices, interest rates, wage growth, and population growth have driven significant revisions to our recent economic and fiscal forecasts. We continue to emphasise the uncertainties around our forecasts and the possibility that any of our key judgements could prove too optimistic or pessimistic. Key risks for this forecast include:

  • While our central forecast is for inflation to return to target this year, the outlook remains highly uncertain. I’m certain this shouldn’t be the central forecast, as discussed. Externally, conflict in the Middle East poses risks to global goods and energy markets. A widening of the current conflict in the Middle East could significantly reduce energy supply from the region and further disrupt global supply chains for goods. In this scenario, quarterly inflation spikes back up to over 7 per cent. This is the scenario that would see interest rates move UPWARDS as I have highlighted as a material risk in recent months. Base would have to go upwards in this scenario – no 2 ways about it. I dislike the fact they don’t try to put a probability on this – I have this at 10-15%, not likely, but “uncomfortably possible”. We estimate that this could raise borrowing by £23.1 billion on average over the five-year forecast and leave underlying debt 0.8 per cent higher as a share of GDP by 2028-29. Domestically, our central projection is for wage growth to slow over the coming year, but wages may prove stickier and keep inflation higher for longer. This is the thing. They primarily care about this because of the tax take – and that’s their job – but the implications would be much, much wider than this, I’m sure you can see that!
  • Our forecast is based on market expectations for Bank Rate and gilt yields, and, while these have fallen significantly as inflation has dropped, they remain unusually volatile. They have, but that volatility has really reined its way in in the past couple of months. Since we closed our November forecast, expectations for medium-term Bank Rate have moved between 2.7 and 4.2 per cent and 10-year gilt spot yields have oscillated between 3.5 and 4.7 per cent. If effective interest rates on all central government debt were just 0.3 percentage points higher or lower, this would eliminate the headroom to debt falling in 2028-29, or increase it by around £9 billion, respectively. No small change. You can see why Hunt has left £9bn headroom – it covers the worst case scenario to break-even. In other words, he has used every single penny that he responsibly can for some small election bribes, that also have theoretical benefit in the medium term to the economy. You’ve got to admit that’s clever (within the rules of the game). 
  • A major change in our forecast since November has been incorporating updated net migration projections and Labour Force Survey data from the ONS. Future migration levels are highly uncertain and difficult to forecast, particularly given policy changes announced since November. Our scenarios show that if annual net migration was around 200,000 higher or lower than the ONS projection of 315,000 in the medium term, it might raise or lower GDP by around 1½ per cent in 2028-29, respectively. I am a light observer of the migration numbers. If asked to throw a figure out there, based on the recent changes, I’d have said 400-450k but the most recent changes to – frankly – put people off including rules about bringing partners, children, etc – may well get that down to something starting with a 3. But it feels to me like we are in a world where disruption from multiple sources makes the UK more and more attractive as a destination. But the impact on GDP per person is much smaller and its direction unclear. In our higher migration scenario, borrowing is £19.9 billion lower by the forecast horizon, and underlying debt 3.1 per cent lower as a share of GDP. Our downside scenario is symmetric, with borrowing up by £19.9 billion and underlying debt up by 3.1 per cent of GDP. I’ve limited regard for GDP per person, I do like the fact they’ve used RHDI per person in some of the rest of the report, although again I wish there were further explanations. If RHDI is up (and it is) and RHDI per person is down (just as GDP per capita is down), then households have simply got bigger in terms of number of people per household. That’s against cultural trends and more being driven by necessity – I wrote a piece some months back asking “where are all these people” because the level of migration simply couldn’t have been absorbed by the rental sector in the way one would expect. Growing households (living with friends, extended family etc.) has been the only way for this to happen, so this does make some sense. 
  • In our November 2023 Economic and fiscal outlook we estimated that ½ per cent higher or lower annual productivity growth would reduce or raise borrowing by more than £40 billion by 2028-29. Productivity growth across the forecast is little changed from November, but the starting level is ½ a per cent lower as revised data shows a larger population producing a similar amount of output. The forecast looks hopeful compared to recent productivity growth, BUT there is a real need to cut costs, there is AI making some impact, and the false figures of the pre-crisis era get further away each day as well of course. In simple terms though, this has to work in concert with the unemployment numbers going up (or the employed numbers going down, as I prefer to look at the figures). 
  • The level of economic inactivity remains significantly higher than before the pandemic. Our July 2023 Fiscal risks and sustainability report considered upside and downside scenarios for future inactivity levels. The downside scenario assumed the working-age participation rate fell 1.2 percentage points by 2027-28, leading to a 1½ per cent fall in GDP, £21.3 billion higher borrowing, and a 3.4 percentage point rise in debt as a share of GDP. The upside scenario was broadly symmetric, but with slightly smaller decreases in borrowing and debt. I think this is unlikely. Solve the industrial disputes in the NHS and numbers WILL come down, not go up – and surely the next administration should do that effectively, as it seems the doctors are now holding on in hope of the Labour government to get what they feel will be a fair pay settlement. Rachel Reeves will have to be the pantomime villain there, because the 35% won’t be happening based on her austere rhetoric!

The report is tens of thousands of words in total, in fact it may easily be over 100k words. Some of this is I’m sure absolutely necessary, some is justification that the OBR is worthwhile (as there seems to be growing rumblings that reform is needed) – some is just so that it is too long to analyse in detail and argue with! Nonetheless the weak performance of forecasts in recent years, and the sweeping of these forecasts under the carpet or “explaining them away” conveniently is never lost on me. I like the concept of the rules – go outside of the rules, and you open up a Truss/Kwarteng situation and a beating from the international bond markets – but whether they are the RIGHT rules or not, run by the right people – that’s tougher to establish.

Anyway. I appreciate we are a long way in this week – but there are two more things I wanted to do with this budget summary. That is to take two opposing interpretations of it, and share those highlights with you. The two summaries of interest are from the Resolution Foundation, who I would describe as centre-left leaning – with the mission of looking after the lower paid (focusing on workers, as Jeremy Hunt keeps saying that he is) and also the Institute for Fiscal Studies, more centre-right. Both well respected compared to some of the think tanks that are less transparent about their funding (see here if you are interested: )

I’m going to start on the left, after tossing a metaphorical coin. “Sweet and Sour” was their preferred analysis, sweet in terms of money now for the lower paid, sour in terms of future austerity in the next parliament. The message is that workers have been prioritised over pensioners (because of the 2% national insurance cut). £8bn given now (that’s to personal net taxes, basically), £38bn split into tax rises (frozen thresholds, mostly) and public sector real-terms cuts (£19bn each) over the next parliament, on their numbers.

They do then make that an apples for apples comparison instead, by pointing out that these measures add up to £65bn of tax cuts over the next parliament. £19bn rise and £65bn cuts – where does the rest come from? Borrowing of course, that is just about sustainable within the fiscal rules framework already discussed. 

Those employed on a £50k salary, about 40% above the median wage, are best off with a £1,200 net boost to the pocket. Those most susceptible to vote Conservative, you might say! Those earning £19k or less (that now means less than full-time minimum wage) are worse off as they lose more from threshold freezes than they gain from cuts. They then consider the whole parliament: Middle earners on between £26,000 and £60,000 will see their personal tax bills fall, while lower and higher-earning taxpayers will see their taxes rise.”

The 8 million taxpaying pensioners are facing an average of £1000 a year higher tax bills. Tax relative to GDP will be up to the highest level since 1948 if all these policies are enacted (and of course they won’t be, either way!).

Cuts to departments that are looming look about 70% as aggressive as those pursued in 2011-2015 – the more meaningful cuts that were sustainable back then, but there is surely far less fat in these departments now than there was back then – before the 2015+ cuts which were the ones much more maligned as “swingeing” or similar.

I’m just going to end this part with two of the quotes from Torsten Bell who is the CEO of the Foundation:

“The biggest choice Jeremy Hunt made was to cut taxes for younger workers, while allowing taxes to rise for eight million pensioners. This is a staggering reversal of the approach taken by Conservative governments since 2010. It is undoubtedly good economics, even if the politics are a harder sell.” and

“For all that, the big picture has not changed at all with this Budget. Britain remains a country where taxes are heading up not down – rising by the equivalent of £3,900 per household – and where incomes are set to remain below their level at the last general election when voters return to the polls.”

Onto the IFS then. More likely to take a position on what this will actually mean, in my experience. Paul Johnson’s opening salvo of his analysis was quite powerful, and I’ve replicated that here as well: 

“Nothing that Jeremy Hunt did yesterday, nor anything the OBR said, changes anything very significantly. Which is a shame. Because that means we are still:

  •   heading for a parliament in which people will on average be worse off at the end than at the start,
    •    looking at a debt to GDP ratio that is at its highest level in 70 years and is showing no signs of falling;
    •    facing debt interest payments at close to all time highs;
    •    seeing worrying increases in the number of individuals moving onto health and disability related benefits, bringing huge challenges for those households and rising costs for the public purse;
    •    (despite the genuinely significant cuts in NICs) stuck with a situation where tax revenues will have risen by a record amount as a share of national income over this parliament and still heading towards UK record levels;
    •    implicitly planning on big cuts in public investment spending overall and cuts to many areas of day-to-day spending on public services despite very obvious signs of strain in many areas.

All of that was true on Tuesday, and all of it remains true today. In all likelihood it will still be true come the general election.”

Tough to argue with all of that to be honest. The fourth point gets you labelled “rabid right-winger” without too much effort, but it has the uncomfortable position of being true, as well. The one bonus he highlights is that the OBR now think we will, in terms of RHDI per capita, be ahead of the pre-pandemic period 2 years before the previous forecast. As you can tell from my analysis, I think it will be quicker than that. The IFS, like many others, fails to distinguish between RHDI and RHDI per capita, which is concerning and is leading to much analysis that is simply incorrect in a wider debating landscape.

The next sentence I want to highlight makes me think even more that Rachel Reeves will frankly need to get someone to tell her how to justifiably change the rules – and perhaps that is Andy Haldane, the former Chief Economist of the Bank of England who is already on this bus in a big way. Here it is: “the next parliament could well prove to be the most difficult of any in 80 years for a chancellor wanting to bring debt down.” Pretty powerful stuff.

The moral of the story from the IFS perspective is that to get anywhere near a country that raises more in tax than it spends, BEFORE we consider debt servicing costs, this £38bn in spending cuts on investment and government departments would need to actually happen, and they – like me – are sceptical. It is noted that the last minute tax cuts have been favoured above government spending increases on defence, which Hunt maintains is on its way to the 2.5% of GDP target.

This is an interesting stat from the IFS: “Well over 60 per cent of pensioners now pay income tax. Income tax changes will leave most of them £650 a year worse off by 2027, and over £3,000 a year worse off if they are higher rate tax payers.” I note the 8.5% triple lock pension rise this year hasn’t been called back to, however!


Mr Johnson dismisses the rhetoric of “working towards abolishing national insurance” from Sunak and Hunt as a false dawn. Firstly, Employer’s national insurance would remain (as many readers will no doubt know to their detriment!) – and anyone who runs a business properly looks at the total cost of the staff when considering compensation packages. Secondly, that £40bn required would need to come from somewhere! Where?

Nicking the non-Dom changes and also the extension to the Energy Profits levy (windfall tax) were both stolen from Labour and make Labour’s job more difficult. All these things that the non-Dom tax changes were going to fund are now gone, and Labour will be running around sorting that out and picking up the pieces. The advantage of the incumbents.

I thought this next sentence was also very fair and beared re-quoting: “If I am sceptical about Mr Hunt’s ability to stick to his current spending plans, I am at least that sceptical that Rachel Reeves will preside over deep cuts in public service spending.” You and I both, Paul – you and I both.

The end was as powerful as the beginning of Mr Johnson’s summary and it is easy to see why he is a very useful Director for the IFS: “this was not a budget which addressed the real challenges we are facing because it was not transparent about what those challenges are. 

Government and opposition are joining in a conspiracy of silence in not acknowledging the scale of the choices and trade-offs that will face us after the election. They, and we, could be in for a rude awakening when those choices become unavoidable.”

For completeness I will just sign off by saying that the IFS has been around for 55 years, and was formed basically because the feeling was that the Government didn’t know its backside from its elbow. That’s improved, but transparency really hasn’t as Paul Johnson says above. The stated mission from 1969 is still as important today, clearly: “To inform public debate on economics, via establishment of rigorous independent research, in order to promote the development of effective fiscal policy.”

Maybe they’ve “got” to lie (although they lie all the time, of course, it is just accepted in the profession) – on both sides. Otherwise they will never win the election. They can only ever be “selectively honest” but the reality we are facing as a nation is five relatively tough years from a fiscal and public sector perspective.

If I’m right about house prices, those not owning property will also face an even tougher 5 years. If I’m right about inflation, then my 25%+ 5-year capital growth forecast is a shoo-in. We will soon find out of course.

Congratulations as always for getting to the end – don’t forget the Property Business Workshop on Wednesday 24th April – tickets for you, or anyone you know who might want one, here: . Onwards, upwards, and we spring into March – Keep Calm and Carry On!