The Budget Breakdown - Episode 1

In this episode, Mark Morton reflects on the Chancellor’s speech at the Labour Party Conference and what it signals for the upcoming autumn budget. He explores government borrowing, tax speculation, and public spending, while unpacking media leaks and political strategy.

This episode kicks off a short series running up to budget day, where Mark will continue to explore key developments and what they could mean for advisors and clients.

For more information on this topic and more, please visit www.mercia-group.com for further details.

Transcript

Hello, it's Mark Morton here. Just towards the end of September, looking out of the window. I'm currently flying across to Ireland doing a face to face presentation in Ireland for lots of people, which is fantastic, and I'm just trying to update myself on the Chancellor's speech today at the Labour Party conference. It's quite interesting. In my mind, the Chancellor has seemed to have kept a pretty low profile over the last few months.

You can't take a low profile at the Labour Party conference when you're going to have to speak, if you're chancellor. So interesting in terms of the nuances that have come through this, trying to set the scene for the autumn budget, and I have to say, it doesn't sound very positive.

Talking of harder choices to come, which is a bit worrying, suggesting that there is nothing progressive about the government spending one pound in every ten on debt interest at the same time, of course, having borrowed more this year than we did last year, and so on and so forth. And if you go back to the mysterious black hole and try to set the scene, the mysterious black hole wasn't very mysterious.

Ultimately, it was to do with a cut in Employees National Insurance prior to the budget, which most people, of course, has forgotten, including the employees that benefited from them. But that was a current year funding deficit. Ultimately, we reduced our income, and the conservative government had not said how they were going to replace that. So a black hole may be not very mysterious. That was twenty billion.

Of course, the Chancellor raised taxes by forty billion, and all that extra money has essentially gone to the NHS. And now we find, having spent all that money, apparently, I mean, a lot of this is going to be to do quite honest with what the Obr's forecast for economic growth is, if that is broadly on track with what Rachel Reeves said a year ago, then her figures are going to stack up.

If it's not, then there's a gap that won't be a mysterious gap because it will be something that is coming to fruition under her watch, of course. So I mean, she talks about harsh global headwinds, but I'm not sure in my mind, a lot has changed in the last twelve months other than tariffs. Other than tariffs and Donald Trump. But of course tariffs and Donald Trump, we've got a fairly good deal as far as it goes from Donald Trump.

But anyway, interestingly, having heard her on radio four this morning, you know, the interviewer said, you know, I'm not going to ask you for tax detail, but it seems pretty clear taxes will rise. And she did not contradict him. I mean, of course, the question is what taxes which taxes will rise? There has been a lot of speculation in the press over the last three or four months, and I think very like what happened before the last budget, i.e. Rachel Reeves first budget.

The government are testing the water, dripping things out into the press and saying that how many people are we going to upset? What do we think the public reaction is likely to be? Do we think we can get away with this? So what we'll do in a series of podcasts is maybe try and look at. And the thing to note about all of these, they are primarily testing the water stroke speculation.

There is nothing specific in terms of detailed government policy, because they'll keep their powder dry as long as possible. I think it's quite interesting. Budget day is pretty late. It's about as late as you could make it, which I think is probably holding on for some good news. You know, why do it now when we know it doesn't sound great? Let's just hold on and see what happens. Interestingly, Rachel Reeves today seems to have committed to not increasing rates of VAT. But of course, not.

Extending VAT is not the same as increasing rates of VAT as we all know. She would not commit to freezing income tax thresholds. I suspect what you will find is some sort of basic increase. It's quite interesting if you look at the schedule currently, the next scheduled increase in tax allowances, whatever that means, is supposed to be just before the next general election. So you look at public feeling about the government currently.

By twenty twenty eight, if they've, you know, if they've not done anything and or don't do much because increasing the personal allowance by, you know, three percent inflation is not going to help tremendously. It'll be interesting to see what public reaction is. I think personally, the electorate has gone past that point where you could bribe me with a little bit of a tax cut, for want of a better expression.

You know, it's neither here nor there, and people's concerns are a bit more fundamental than that. So not said a lot, but setting the scene. The other thing that interested me was the big announcement that came as part and parcel of this, which was in broad terms, seems to be saying if we've got seventeen or eighteen year olds and this is on top of previous announcements that are claiming state benefits, fundamentally they will be offered work.

And the suggestion seems to be if ultimately they don't take that work, then the state benefit will be withdrawn. Now the interesting thing is, where are you going to offer them work? Ultimately, possibly a lot of starting jobs in hospitality, for example, have disappeared in the last year Because ultimately of the impact of National Insurance and increases in costs.

Listening to the CEO of Starbucks saying coffee costs going up, government overheads going up, we don't think people are going to pay six pounds for a coffee. So we've got to start to think accordingly. So it's not just the knee, but of course the knee hasn't helped. And we all know as private businesses, ultimately if you increase our costs, we've got to try and accommodate them.

Whether we try and pass that on to customers, which I would suggest is called inflation, whether we try and cut those costs internally by less pay rises for existing staff, or getting rid of some existing staff, or not recruiting any more staff. It all has implications. And you see the data. Job vacancies down, unemployment up, inflation sticky. It's not a great surprise. I wouldn't have thought that. These are the implications. And this is the backdrop against which the budget will be held.

But keeping taxing and taxing doesn't seem to me the way out of it. And it's quite interesting. There've been a couple of comments in the last over the weekend and, well, you know, we can't go back to what Liz Truss did and so on and so forth. What what was quite interesting. I think people forget this. What was Kwasi Kwarteng and Liz Truss actually saying? They were saying we want to cut some income tax rates. So we want to cut basic rate of income tax.

We want to we want interestingly, we want to abolish additional rate, which was a bit of a strange political choice, but we want to cut some tax rates. We want to take a little bit off dividend rates. We are going to give some clarity that there'll be no further cut increases, investment zones, etc.. To me, a lot of those things in terms of tax were good things.

Ultimately, the strange thing was the way it was done, because of course they didn't say how they were going to fund it at the outset and that caused chaos. But you fast forward to today. Government borrowing rates are higher today than they were after that announcement, rather strangely. So we are in strange times. I think personally, that the time has come for something rather more radical than, you know, we will increase taxes around the margins.

You know, you have two sides of the coin, you have public spending and you have tax rate increases and how much the public are prepared to keep paying more and more tax to get less and less return out of public services remains to be seen, ultimately. But anyway, we will talk about some of the speculation in tax over the next three or four weeks and hopefully broadly explain what is being dripped through the press.

I think the concerning thing for me is, as before the last budget, you know as well as I you have clients coming to you saying, what should I do? What should I do? Let's be clear on any of the stuff that I will be talking about over the next three or four weeks. Nothing has been decided. Nothing has been announced. And hence if you take decisions in an uninformed manner, if that's the right expression, you may rue the consequences. It may benefit you. It may not.

Anyway, it's a beautiful day in Ireland. The sun is out. First time I've seen the sun in Ireland for some years. So on that happy basis I may go and have a little walk in the sunshine, but I will be talking to you again soon in some of these podcasts. Thanks very much, everybody. Goodbye..