Blog - 28th February 2024

Feb 28th, 21:06

Blog - 28th February 2024

In this blog I preview next week’s budget and its implications for public services; and announce some new webinars on local authority housing finance; registering a new housing association; and service charges for May and June 2024.

houses_of_parliament_2,1 The Houses of Parliament where the budget will be presented next week

The government will present its next budget next week. It has already told us that the focus will be on pre-election tax cuts. However, it will be grim news for public services and the people who depend on them.

The Resolution Foundation find that, despite bad news on the economy, lower interest rates are likely to increase the Chancellor’s room for manoeuvre. Their updated projections suggest that headroom against the Government’s fiscal targets is likely to increase by £10billion to £23 billion.

Personal tax cuts look likely. Cutting the basic rate of Income Tax by 1p or cancelling the Personal Allowance freeze in 2024/25 would each cost £7billion. A cheaper option would be cutting employee National Insurance again by 1p, at a cost of £5billion. Other options include raising the Child Benefit withdrawal threshold from £50,000 to £70,000 (costing £2billion) or abolishing it altogether (costing £4billion).

Another option available to the government would be to cancel the 5p increase in fuel duty planned for 23rd March at a cost of £2billion next year. Freezing fuel duties in the wake of high inflation would, of course, represent a real reduction in tax at a time when the need to encourage people to make less use of fossil fuels has never been greater.

The Resolution Foundation points out that any tax cuts will follow tax increases that have already happened and those already scheduled for after the election. Tax rises of around £20billion were introduced in 2023/24, including freezing personal tax thresholds and increasing Corporation Tax. And a further £17billion of tax rises are set to come into effect in the next Parliament, including a Spring 2025 Stamp Duty rise and three extra years of tax threshold freezes. So, if next week’s budget does include tax cuts, these will probably be an illusion. For example, cutting the basic rate of Income Tax by 1p while maintaining the personal allowance freeze next year would mean anyone earning less than £38,000 would see their personal tax bills increase rather than fall.

The Resolution Foundation predict that more tax rises are to come after an election. This is not only because tax rises are often announced shortly after elections, but also because the idea that fresh tax cuts are affordable rests on spending plans that require real per-capita spending cuts of around 18% for unprotected departments that they consider would prove undeliverable.

The Financial Times reports that Treasury officials are looking at reducing the projected rise in public spending from 2025 onwards to about 0.75% a year that would release £5billion to £6billion for tax cuts in this budget.

The Guardian reports experts as saying that the level of public sector spending reductions pencilled in for the next parliament are equivalent to those made from 2010 to 2015. Some have warned that the next government will not be able to implement them and will be forced either to raise taxes or borrow more to fund emergency spending. They conclude that public services will buckle under the weight of these budget reductions.

Some economists have warned that even the current plan for 1% real terms increase in public spending every year until 2029 is a fiction. This would require serious cuts in stretched public services. With a growing and ageing population, public services need significant real increases in budgets each year simply to continue to provide the existing levels of service.

Furthermore, the reductions would have to be made in unprotected departmental budgets such as local government (including adult social care), housing, courts and prisons. Pensions, NHS and schools spending are protected and, if this policy is to be continued, reductions in other services will have to be extremely severe.

The Institute for Fiscal Studies have published a report that calculates that government would need to find £35billion of budget reductions if they wanted a spending freeze. They called for vague pledges to reduce spending to be replaced with concrete plans on where savings could be achieved, given the likely hardship and difficulty of achieving further reductions. Their report on the budget concluded that:

“The economic case for tax cuts is weak. The public finances remain in a poor position.”

Andrew Goodwin, chief UK economist at Oxford Economics told the Guardian that:

“The problem is that this comes on the back of large real-terms cuts for those departments from 2010 to 2015 and quite restrained spending since then. Efficiency savings have long since been exhausted – you’re now really talking about choosing which services not to provide any more.”

Stuart Hoddinott, a senior researcher at the Institute for Government, told the Guardian that:

“The current state of public services are generally pretty poor across the board. If any government was to try and implement these spending plans, they would lead to a deterioration in performance that would be unacceptable to any government.”

Christina McAnea, the general secretary of Unison told the Guardian that:

“Public services are in the last chance saloon. Years of underfunding mean they’re already close to collapse and slashing spending further still is the last thing anyone needs.”

Lord Deben, the former Conservative chair, told the Observer that:

“The priority for most people at the moment is to improve public services to make sure that those who are least well off are looked after and to make it more attractive to work.”

Martin Mikloš, an economist at the Institute for Fiscal Studies and one of the report’s authors, told the Guardian that:

“In November’s autumn statement, the chancellor ignored the impacts of higher inflation on public service budgets and instead used additional tax revenues to fund eye-catching tax cuts. At next week’s budget, he might be tempted to try a similar trick, this time banking the higher revenues that come from a larger population while ignoring the additional pressures that a larger population will place on the NHS, local government and other services… He might even be tempted to cut back provisional spending plans for the next parliament further to create additional space for tax cuts. The chancellor should resist this temptation. Until the government is willing to provide more detail on its spending plans in a spending review, it should refrain from providing detail on tax cuts.”

nottingham Nottingham City Council is one of those that has issued a section 114 notice.

In local government, eight English councils have in effect declared themselves bankrupt since 2018 by issuing section 114 notices, and 20% of them believe they are likely to go bust over the next year. This calls into question the ability of local authorities to continue to fund the adult social care system that is already generally regarded as being neither fit for purpose nor adequately funded. Children’s social care is another local government service where councils don’t have the resources to meet needs.

In housing, local authorities and housing associations are still reeling following the 60% cut to housing budgets that was made in 2011. Since then, housing associations and local authorities have used all their borrowing capacity to fund new affordable homes but are now faced with increased interest rates that make further borrowing unaffordable. Meanwhile, the housing crisis worsens with fewer people able to afford to buy homes, fewer able to afford to rent homes, not enough affordable housing to meet need and consequently increased housing waiting lists and homelessness. Managing homelessness is another service that many councils are struggling to afford.

So, what we are facing is a ‘perfect storm’ of tax increases and expenditure cuts because of the government’s recent addiction to funding spending through borrowing.

Please click on the following links for more information about my next webinars:

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