The Budget is a missed opportunity to address the UK’s structural investment weaknesses and could see the government needing to raise taxes again at next year’s Budget, Rathbones, one of the UK’s leading wealth and asset management groups, has warned.
Responding to Chancellor Rachel Reeves’ Budget on Wednesday, Oliver Jones, Head of Asset Allocation, said: “The package of tax increases announced today has so far been received calmly by the government bond market, with the Chancellor sensibly building additional headroom against her key fiscal rule. But beyond that, this Budget is another missed opportunity to address the structural causes of UK’s tough fiscal situation by prioritising economic growth and investment. The changes to pension salary sacrifice rules, which continue a trend under this government of less generous tax treatment of pensions, were particularly disappointing in that regard. They will work against the government’s broader agenda to drive more investment from pension funds into productive assets in the UK.
“The Chancellor may not even be out of the woods, with regards to her fiscal headroom. £22bn is still less than the average headroom Chancellors have historically maintained against their fiscal rules, in an era of heightened economic volatility. And Rachel Reeves has repeated the old trick of announcing tightening measures which are heavily backdated and will not make any difference in the short term, like the decision to keep income tax thresholds frozen for three more years which was the largest single revenue-raiser.
“Backdated measures are inherently less credible, because there is more time for them to be overtaken by events. In the next three fiscal years, the measures announced today increase spending by more than taxation. It is only towards the end of the forecast that tax changes in this Budget, especially the freezing of income tax thresholds, bite.
“The fiscal watchdog judges that the probability of the government meeting its budget rule is only 59%, and its debt rule just 52%, illustrating just how little margin for error the Chancellor is still working with. With all of that in mind, it is still easily possible that Rachel Reeves finds herself looking for more tax increases again in a years’ time. And longer-dated government bonds, which are particularly sensitive to perceptions about the fiscal outlook, are likely to remain volatile.
“The Budget also contained some measures which will temporarily bear down on inflation, mainly by the Treasury covering some of the renewables obligation in energy bills. They could shave about 0.4pp off the headline rate (which is currently 3.6%) in 2026-27. But some of that impact is expected to reverse over the following couple of years, so the longer-term picture has not fundamentally changed.”
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