Spring Budget 2024 preview

What are the current issues/future challenges?

“Ahead of the next General Election, the Chancellor will want to present an optimistic Spring Budget that supports personal and business aspirations.

“Having cautioned that there may be limited room for tax cuts, the Chancellor has not closed the door entirely, adding that he would look at cuts if he believes they will grow the economy faster and for the long term. If any wiggle room can be found, the urge to have something eye-catching will prove difficult to resist and is most likely to be focused on personal finances or possibly on the housing market.

“Given the likely pace of recovery in the economy in 2024, an early Budget and the fact that the Chancellor may have over six months to play with, it's possible that we may see limited measures in the Budget with more significant tax cuts in an early Autumn Statement.”

What are the Chancellor's options to spark growth/remove roadblocks?

“The Chancellor may want to build on the positive announcements of the Autumn Statement while also setting out a future economic roadmap. While tax cuts may create headlines, using the Budget as a launch pad for a long-term vision would be welcomed by business.

“Building on the national insurance cut in the Autumn Statement, these measures could include further broad based tax cuts in the basic rate of income tax, increases to the personal allowances or adjustments to NIC. Furthermore, scrapping inheritance tax, re-launching a Help to Buy type scheme to aid first time buyers, and increasing the ISA limit have all been speculated. The advantage of these much talked about targeted measures is that they can be introduced at much less cost than a major change to income tax or national insurance. 

“With the UK having entered a ‘technical recession’ in December 2023, nurturing business confidence will be crucial for boosting investment and increasing productivity. Businesses will be keen to see the Chancellor addressing workforce shortages, and presenting opportunities to incentivise innovation and increase economic growth. The November announcement on full expensing was well received by business but should not be seen as ‘job done’ on stimulating investment and innovation.

“Clear, long-term policy direction provides the best basis for investment. Where reforms are taken forward, the Government will need to set out clearly what it is trying to achieve and the reasoning behind proposals. Consultation with business, big and small, will be critical to successful reforms. 

“The Government may also see this as an opportune time to set out its vision for how it will incentivise the move towards net zero. While we’re unlikely to see any intervention on the scale of the USA's Inflation Reduction Act, PwC research has shown that the UK public is broadly supportive of subsidies that could incentivise green investment.”

What are the current issues/future challenges?

“The UK was in a technical recession at the end of last year. The contraction in GDP was larger than many had expected so this may impact confidence in the progress of an economic recovery the Chancellor will want to present at the Spring Budget. 

“We do, however, expect this episode to be one of the shallowest recessions of modern times, as it does not reflect a sharp and protracted downturn in response to a specific set of adverse economic circumstances.

“As the upcoming Spring Budget approaches, it stands as a pivotal moment for the current Chancellor, potentially marking his last fiscal event. Seizing this opportunity, he will want to leave with a bang by shrugging off fears about a prolonged recession and confirming the success of his economic strategy with the announcement of possible tax cuts-- all while staying within the fiscal rules. 

“Recent fiscal data paints a promising picture. For example, Government borrowing has been lower than anticipated by the Office for Budget Responsibility (OBR) during the Autumn Statement , which means that the Chancellor's starting fiscal position is more favourable. Additionally, recent upward revisions to UK population forecasts by the Office for National Statistics (ONS) suggest the economy will grow faster in the future, which is likely to have a positive impact on public finances. These effects are likely to dominate the offsetting impact of lower than expected inflation which tends to reduce the size of the cash economy.

“However, we suspect there will be little detail on key future challenges the UK economy faces. First, all evidence suggests that we won’t see significant spending commitments in areas of public services which are chronically underinvested, despite the tax to GDP ratio remaining at historically high levels. Second, there will be little detail on the specific spending plans of the future, in view of the international challenges—climate change, security and instability in the global trading system—the UK faces. And third, there is unlikely to be any specific plan for the UK economy to discover its joie de vivre to reignite productivity growth, which is the real driver of economic prosperity. 

“Finally, as this is likely to be an election year, the Chancellor could also pull the rabbit out of the hat by announcinging policy changes in the residential housing market.” 

What are the Chancellor's options to spark growth/remove roadblocks?

“The Chancellor will want to outline support for aspiration and we expect he will have some fiscal wiggle room to do so. He will need to decide whether to use this headroom and if so, whether to focus on additional spending or tax cuts. It’s likely that he will be going for a combination of the two, in a bid to push short-term growth rate upwards. 

“A balance in an election year will need to be found. The levers that could provide an immediate boost to the UK economy-- a closer relationship with our largest trading partner the European Union, or higher levels of immigration, are politically unattractive. So the best the Chancellor can do in the short-term, is to provide certainty to businesses on the future policymaking trajectory of the UK economy. Having a joined up Industrial Strategy which considers both the manufacturing as well the services and primary sectors of the UK economy in a rapidly changing world should be part of that policy. But these types of strategies require careful analysis, consultation with the private sector and other stakeholders and consideration about the future direction of the country-- all of which require time. 

“The other areas the Chancellor could focus on include policy areas which have a low fiscal cost but high economic impact-- these could include reforms to the planning system or skills reform. However, in reality there are limited options for the Chancellor to rapidly increase economic growth in a sustainable manner. His more realistic option is to hope for external economic conditions to improve and that a rising tide lifts all boats, including the UK economy.”

What are the current issues/future challenges?

“The public is increasingly feeling the tax burden as a result of high inflation, tightening income and fiscal drag which has pulled many into the income tax system for the first time or into higher tax bands.

“However, the extra tax revenue collected as a result of freezing tax bands and allowances has been important for the public purse. 

“The Chancellor has a difficult balancing act; appeal to voters through tax cuts and increased incentives, while keeping the books as balanced as he can.” 

What are the Chancellor's options to spark growth/remove roadblocks?

“In an election year, any broader tax rises are most likely off the table but there could still be targeted increases or tightening of reliefs to free up money for use elsewhere. The IMF has recently warned against cutting taxes so that public borrowing can be curbed, but he will no doubt be tempted by the ‘feel good’ factor that a reduction in income tax rates would bring. A 2% cut has been speculated but due to the tight public purse and potential fear of undermining the Bank of England’s efforts to curb inflation, this may settle at a 1% cut, with even this estimated to cost £6bn.

“Another option for the Chancellor is to increase income tax thresholds - currently frozen until 2028. Despite the recent 2% cut to National Insurance contributions (NICs), the freezing of the thresholds means many will still see an increase in their overall tax burden. This fiscal drag effect has paid well, and could be costly to relax. The Resolution Foundation predicts annual receipts will be around £40 billion higher in 2027-28 than expected in March as a result of frozen thresholds, although a tweak here would bring a welcome boost to household income. 

“More targeted options, but less impactful, could be to abolish or reduce inheritance tax to appeal to older voters, adjustments to the High Income Child Benefit charge threshold or an increase to the ISA limit. The ISA allowance limit hasn’t moved since 2017 so feels overdue, although few savers reach the current limit so its impact would be relatively small. Addressing ‘cliff edge’ measures such as the High Income Child Benefit charge or withdrawing the personal allowance could be eye-catching and work towards simplifying some aspects of the tax system as an added bonus.”

What are the current issues/future challenges?

“R&D intensive industries, such as life sciences and digital technologies, are a crucial driver of UK economic growth and an important area for the Chancellor to showcase a pro-business agenda. 

“Confirmation made in last year’s Autumn Statement that the SME and large company R&D schemes would merge in April 2024 was met by mixed views from businesses. It was welcome simplification, but uncertainty remained on who will be entitled to claim R&D under the new rules. 

“We have since received new guidance which provides some clarity on how the new rules are likely to work. Careful judgment will still be needed in a number of areas, for example, in many commercial situations, when determining whether overseas costs will be eligible.”   

What are the Chancellor's options to spark growth/remove roadblocks?

“The focus in the Autumn Statement on R&D and subsequent updated guidance have been welcome progress, but there is much that can be considered to be improved upon. Certainty is crucial for these incentives to have the impact of influencing decision making on investments in R&D.

“An area of focus could be the challenge many UK businesses face when scaling up in relation to the funding requirements for the capital expenditure required for R&D and to develop manufacturing facilities. This lack of funding often means these businesses turn to the global markets for foreign investment. While capital allowances are available, these do not provide a cash incentive and therefore do not provide any immediate funding support for businesses yet to generate profits from the R&D. The Chancellor may consider a similar relief to the R&D expenditure credit (RDEC) for R&D and scale up capital expenditure or potentially include these costs within RDEC. 

“Other areas of focus for the Chancellor could be improvements to the patent box, by potentially widening this out to more IP to include software protected by copyright such as is seen overseas. This could help to bring into scope more emerging technologies such as AI. Currently only 1,500 companies claim patent box compared to approximately 90k R&D claims.”

What are the current issues/future challenges?

“For an eye-opening four decades, the UK has consistently had the lowest level of business investment as a percentage of GDP in the G7. Before the super-deduction, introduced in 2021 and replaced by full expenses in 2023, the UK ranked 30th out of 37 countries in the OECD in terms of competitiveness of the capital allowance regime. With the introduction of the super-deduction and now the move to full expensing, the UK is in the top ten.

“Confirmation that the full expensing regime is now permanent will provide businesses the certainty they have been looking for. This will support long term investment decisions and a significant cash flow benefit which will enable businesses to obtain 100% relief in the year of investment on qualifying plant and machinery, rather than spreading it over a number of years. Recent CBI analysis expects that full expensing will help increase GDP by 2% and result in a 21% increase in the level of business investment by 2030.

“Further announcements on the extension of the tax advantages of new ‘investment zones’ and ‘freeports’ up to ten years, rather than five, further increased certainty for businesses to make long term UK investments.” 

What are the Chancellor's options to spark growth/remove roadblocks?

“Promoting high levels of business investment is critical to help stimulate growth and encourage long term investment in the UK. The Autumn Statement introduced a number of measures that will assist in this going forward, but there are additional options open to the Chancellor should he see it is needed. The consultation launched this year to potentially introduce further simplification to the system of capital allowances on plant machinery will be closely monitored by businesses to see whether any changes are likely to be extensive or more tidying up areas of the legislation which are no longer relevant.      

“The Autumn Statement measures to stimulate growth benefit businesses that are cash tax driven but there is still a gap for businesses, for example, those that are loss making or effective tax rate (ETR) driven. Incentives that are provided irrespective of the tax profile of businesses, for example through a credit for loss making businesses, could appeal to the Chancellor given the current state of the economy.”

Rob Walker, Leader of Real Estate at PwC UK.

What are the current issues/future challenges?

“The long-term undersupply of new homes against a backdrop of rising long-term demand has resulted in declining affordability for young prospective buyers and increased housing costs for renters. Resetting the dynamics of the housing market, with a focus on long term supply across all tenures and price points, is the single biggest challenge facing the sector today. 

“Addressing this challenge will require a comprehensive reappraisal of land use and planning, delivery models and financing, and labour, skills and productivity. The growth dividend for getting this right will be significant right across the country.”

James Bailey, UK Housing Leader at PwC UK, added:

What are the Chancellor's options to spark growth/remove roadblocks?

“With a General Election on the horizon it is anticipated that the Chancellor’s focus will be on short-term demand measures - namely stamp duty reforms or holidays and alternative mortgage products targeted at first time buyers - with some intervention to help boost numbers on the supply side via expanded roll-out of permitted development rights (PDR). 

“On the positive side, these measures will help to provide much-needed access to homeownership and offer a short-term boost to housebuilders faced with a softer market and the wider economy that feeds off that. When done thoughtfully, PDR could provide a much-needed boost to high streets and town centers, albeit it will be important to make sure that quantity does not come at the expense of quality.”

“A critical point remains that housing supply issues are being hampered by challenges in planning. Focusing on building on brownfield sites is a reasonable starting point, but the Government may feel the need to look at making use of green belt land by adopting a more nuanced approach. Firstly, some areas within the green belt are less environmentally sensitive than others, so a more selective approach could be part of the solution. Secondly, the provision of social infrastructure can be part of a broader strategy that enables the development of larger sites in an amenity-led style.”

What are the current issues/future challenges? 

“There is widespread agreement that the current funding for local and regional public service delivery is not conducive to driving the regional economic growth that the country so desperately needs. Whilst we’ve started to see progress in the number of devolution deals, the scale and pace to which local areas are incentivised to take accountability to address the big societal problems is severely lacking. 

“Coupled with this there’s no escaping the financial stress an increasing number of local authorities are under and the effect this is having on services provided to citizens.”

What are the Chancellor's options to spark growth/ remove roadblocks?

“The Chancellor will be hearing voices calling for a new deal between central and local Government to empower local leaders and to create shared accountability to tackle the huge drivers of regional inequality, such as economic inactivity and low productivity. The Chancellor may consider targeted measures to incentivise local areas to deliver outcomes for citizens for example by allowing them to keep the financial benefits they save through interventions to reinvest in their areas. 

“To ease the financial challenges facing local government, the Chancellor may take steps to encourage a level of reorganisation to create a more streamlined mapping of local authorities. This may be a more palatable approach than other options and would be a longer term fix.”

What are the current issues/future challenges? 

“There is a need for investment and progress in redesigning the NHS estate, particularly around the New Hospital Programme, as well as significant digital transformation that can transition care out of hospitals. This continued demand on public funding for such a sizable investment that needs to encompass, not only acute but also mental health, community and primary care assets, is not sustainable. The UK  therefore needs to look to a blended model that can draw in private capital alongside available public capital whilst focusing on a collaborative approach between the public and private sector whilst addressing historic negative perceptions and inflexibilities of previous models.”

What are the Chancellor's options to spark growth/ remove roadblocks?

“We are likely to see some short-term commitments by the Chancellor to bring forward specific hospital programmes ahead of the general election, which are likely to be Reinforced autoclaved aerated concrete (RAAC) schemes. But this won’t deliver the much-needed long-term estate investment plan to address aging infrastructure and the need for more care outside of a hospital setting.

“The legacy of PFI means many stakeholders may associate the use of private capital with high costs, inflexibility, and poor relationships. To overcome this perception and to attract private sector participation to a new generation of public private partnership projects, if the Chancellor is able to set out a vision and pipeline of opportunities, as well as a robust and transparent framework for risk sharing, co-investment, and governance, this could reset the dial. It should also be noted that reinventing the wheel is not necessary and looking to Wales and its Mutual Investment Model (MIM) is a great starting point.

“We believe that an ambitious but realisable capital programme for the NHS over a five-year period could deliver up to £10 billion of investment in new and refurbished health infrastructure, with a potential 50:50 split between public and private capital. This would enable the NHS to address a significant proportion of its backlog maintenance, as well as to develop a pipeline of mixed-use community assets that could support the integration of health and social care, the delivery of more care closer to home and the reduction of carbon emissions.”

What are the current issues/future challenges? 

“Since the pandemic, the number of older inactive workers has increased by 244,000, meaning those aged over-55 in the UK are more likely to have left work and not returned than those in other G7 countries, according to our Golden Age Index. While unemployment rates remain relatively low, workers over 55 years old have not experienced a post-pandemic recovery.

“There is a need to close the gap. Convincing older workers to return to work could help businesses deal with labour shortages fast as well as filling vacancies with experienced staff, so policies that support and incentivise older workers to return to work could provide a big boost to the economy.”

What are the Chancellor's options to spark growth/ remove roadblocks?

“The Chancellor has already introduced measures to address the issue, including the WorkWell service announced at last year’s Spring Budget and the Back to Work plan at the Autumn Statement. However, there may be more that can be done at the Spring Budget.

“Public finances are tight currently, so a large investment is unlikely, but a road map outlining a tax strategy would be possible. Around half of all taxes are raised from working, so it is crucial to address and encourage the development of skills that enable individuals.

“Options open to the Chancellor include corporate incentives such as NIC relief or “super deduction” for employment costs if an employer employs targeted populations (i.e. older workers, those returning from long term leave, younger workers etc). For workers, changes to the way in which benefits are reduced / removed for individuals at specific income levels. In addition, a key to future sustained growth and high employment levels will be skills development, and therefore consideration could be given to there being fewer restrictions to allow employers to access their apprenticeship levy to provide more flexible training, or incentives linked to the movement of workers to those regions with skills shortages.”

What are the current issues/future challenges? 

“Many businesses have difficulty in navigating the UK’s complex VAT system, but in the post-Brexit environment, the Chancellor has many options at his disposal to simplify the rules and reduce administrative costs for UK businesses. This might include simplification of VAT rates and exemptions or implementing easements to help small businesses who are on the cusp of the VAT registration threshold. 

“With an election coming up, the Chancellor may be looking at more short term measures but also considering ideas which are focused on reducing compliance costs through simplification, as well as initiatives for supporting innovation in UK businesses.

“In December 2023, the Government announced that it would implement the Carbon Border Adjustment Mechanism (CBAM) in 2027. The aim of CBAM is to impose a carbon price on certain goods imported into the UK and create parity with similar goods which are produced within the UK. We are expecting to see the further details on the proposals through a consultation in 2024.” 

What are the Chancellor's options to spark growth/ remove roadblocks?

“The current VAT registration threshold has remained at £85k since 2017 and can be a barrier to expansion for many small businesses. The Chancellor may want to review this threshold to help encourage entrepreneurialism and innovation in small businesses. 

“Also expected is a review of VAT free shopping which was discontinued following Brexit in 2021. The Chancellor has asked the OBR to review the economic impact of the scheme’s removal. The OBR’s findings will be highly anticipated by many in the tourism and retail industries who would welcome a reintroduction of the scheme which they consider would boost UK attractiveness and re-establish parity with EU travel destinations.”