Initial Reaction to the Budget
The second day after a budget is always an important moment, as financial think tanks gather to deliver their preliminary verdict on the Chancellor’s decisions. This moment is more important than ever when the budget is a big deal. The Institute for Fiscal Studies (IFS) and the Resolution Foundation assessed this year’s budget, and while neither managed to sum it all up in a single soundbite, they both sounded reasonably positive.
Reservations and Criticisms
There were a lot of big reservations, with the IFS leader stating that Labor had broken its manifesto promise not to increase national insurance. The Resolution Foundation argued that the tax rise would have been significantly fairer and more progressive if the Chancellor had only increased the basic rate of income tax rather than freezing personal allowances. Additionally, there was criticism of other parts of the budget, such as the structure of the electric vehicle tax and the villa tax.
Overall Assessment
Despite the criticisms, the high-profile institutions seemed to support this year’s budget, certainly more than last year. This is primarily because the budget was more cautious, doubling tax insurance to just over £21 billion. The margin depends on a few important factors, including the government sticking to its promises to contain spending growth and collecting all of the promised tax revenues.
Challenges Ahead
However, the budget problem is deeper, with most of the difficult issues postponed to the final year of the forecast. The government will come under pressure as all Britons are asked to pay more taxes, and Labor has a general election coming up this year. The economic background is also challenging, with living standards forecast to rise at the slowest rate since the 1950s, barring the pandemic and the energy price shock.
Market Confidence
Despite the challenges, the Chancellor has initially managed to draw up a budget that strengthens her position. Markets remain relatively confident, and bond yields are lower today than before the event. However, this was a complex budget, and there is still the possibility that large portions of it will not work. It may be quite a while before we figure out which parts work and which don’t.
