February 2024 monthly update

Read our February monthly update – a roundup of the latest financial news and economic headlines.

Chancellor considering launching ‘British ISA’

Chancellor Jeremy Hunt said that he is “very attracted” to the possibility of creating a tax-free savings account designed for investment in British stocks. This ‘British ISA’ would form part of his efforts to boost the UK’s fluctuating stock market.[1] At TheCityUK dinner on 8 February 2024, he stated: “do I want to do things that mean that more UK capital is invested in our most promising companies? Absolutely.” He also added that “something like a British ISA, it could be very good at that.”[2]

The plan comes as the City of London faces increased competition from rival financial superhubs such as New York, Paris, Frankfurt, and Amsterdam. The threat has grown particularly potent after Brexit reforms. After Britain left the European Union, London’s stock market has seen an exodus of companies leaving for capital in other nations. Flutter Entertainment, the owner of Paddy Power, Betfair, and FanDuel, said that they were considering moving their primary listing to New York “as soon as practicable.”[3]

Currently, the government charges a 0.5% tax for any shares bought in the country. This is known as the Share Purchase Stamp Duty. A British ISA, however, would allow investors to buy a certain amount of shares without paying tax. [4] Proposals include an additional £5,000 tax-free allowance for UK-listed equities only on top of the current £20,000 general allowance. Government officials are also speculating about restricting a section of the general allowance solely for the same purpose.[5]

The incentive could complement the Treasury’s plans to sell shares in the banking giant NatWest. Nearly 40% of NatWest is still owned by the state since its 2008 taxpayer bailout but it is to be marketed to retail investors later this year.[6]

Some political advisors, however, are against the idea. They believe that the proposals risk narrowing investor choice and add complexity to the ISA structure.

“This feels more like a gimmick than long-term policymaking in the interests of savers and investors,” commented Tom Selby, director of public policy at AJ Bell. He agreed with the argument that restricting extra ISA allowance to UK equities would complicate matters for savers. [7] “A much simpler solution would be to increase the overall ISA allowance and leave individuals with the freedom to invest in a way that suits their needs and appetite for risk. Many would naturally choose to invest in the UK of their own volition, meaning there would be a benefit to UK firms without the layering on of unnecessary complexity.”[8]

Moreover, industry figures point to the government’s failure to deliver on similar plans in the past. In the 2023 Autumn Statement, the possibility of a British ISA was raised but it was dropped soon after. Instead, Hunt chose to enact £20bn in cuts to business and personal taxation. Alongside this, the Chancellor announced that savers would be allowed to open multiple ISA accounts in one year. The government would also consult on allowing investments in fractional shares (parts of a single share) after facing criticism from smaller trading platforms.[9]

One provider, speaking to the Financial Times, warned that these proposals are not likely to be deliverable in time for the upcoming general election. They said that “we don’t even have draft legislation in place to implement these changes – and they’re looking at another change in place. There’s no sense of a long-term strategy.”[10]

The Financial Times reports that the British ISA is unlikely to be a part of the Spring Budget. Allies of the Chancellor confirmed that with limited “fiscal headroom” available, the government might focus on “bigger priorities” like pre-election tax cuts.[11]

British economy slipped into recession last year

The UK economy fell into a technical recession in the final quarter of 2023 according to figures from the Office for National Statistics (ONS). Britain’s GDP contracted by 0.3% in the last three months of 2023 after a 0.1% decline in the previous quarter as well. Although there is no official definition, most experts consider two back-to-back quarters of negative growth to be a technical recession.[12]

Over the last year, the GDP rose by a meagre 0.1%. Excluding the pandemic’s unprecedented effects in 2020, this marks its worst performance since 2009; when the world was still reeling from the financial crisis.[13] Similarly, economic growth per head of the population decreased for seven consecutive quarters – the worst performance since modern records began in 1955. The turmoil highlights the issues faced by households who are under pressure from skyrocketing prices and higher borrowing costs.[14] GDP per capita adjusts for population growth and relayed the same story. It contracted by 0.6% in 2023’s fourth quarter after a 0.4% decline from July to September. Overall, seasonally adjusted GDP per capita shrank by 0.7% in 2023.[15]

“All the main sectors fell on the quarter, with manufacturing, construction and wholesale being the biggest drags on growth, partially offset by increases in hotels and rentals of vehicles and machinery,” explained Liz McKeown, director of economic statistics at the ONS. She also described last year’s economy as “broadly flat.”[16]

The ONS noted a 0.2% decline in services, 1% in production, and 1.3% in construction output.[17] There were several areas where the economy faltered at the end of the year such as consumers spending less during the December holiday season; perhaps after taking advantage of Black Friday sales in November. Additionally, the health sector was influenced by strikes from junior doctors.[18]

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, commented: “though the shallowness of this recession provides comfort, these figures also confirm that our economy remained locked in a cycle of persistent stagnation throughout 2023.”[19]

Thiru’s theory is supported by the fact that while inflation has fallen, it remains above Britain’s economic peers and the Bank of England’s 2% target. The headline consumer price index statistic was also reported at 4% year-on-year in January 2024.[20] Investors have placed bets that the Bank of England will deliver its first interest rate cut in June with the markets now pricing in an estimated three 0.25% cuts this year.[21] The central bank updated its predictions for economic growth in 2024 to 0.25% – a positive outlook compared to its former forecast of zero growth. It predicts 0.75% growth for 2025.[22]

In more optimistic news, food inflation fell to 7% from a recent high of 19.2% in March 2023. When contrasted with earlier months, food prices recorded their first decline in over two years. Salaries have grown faster than prices for seven consecutive months as well. Excluding bonuses, average wages increased at an annual rate of 6.2% in the last quarter.[23]

While it is expected to be short-lived by historical standards, Britain has now joined Japan to be one of the G7 countries that are in a recession. The pound sterling weakened against the dollar and the euro. In response, businesses called for more help from the government in the Spring Budget.[24] BBC News reports that Chancellor Jeremy Hunt is seeking to squeeze public spending even more to deliver tax cuts in the Spring Budget.[25]

Prime Minister Rishi Sunak had promised to grow the economy as one of his five flagship priorities for the government. The recent figures, however, have dealt a blow to the Conservative Party’s election prospects. Rachel Reeves, Shadow Chancellor, claimed that Sunak’s pledge was “in tatters”. “This is Rishi Sunak’s recession, and the news will be deeply worrying for families and business across Britain,” she said.[26]

“When the Prime Minister made his commitment, he was very clear, tackling inflation had to come first,” Hunt told the BBC when asked whether Sunak had fulfilled his promise or not. He continued: “The big picture is that actually since then the economy has been more resilient, unemployment has stayed low, real wages have been rising now for six months. And if we stick to our guns now, we can see light at the end of the tunnel.”[27]

UK tax burden to hit record high

According to analysis by the Institute for Fiscal Studies (IFS), Chancellor Jeremy Hunt lacks the “fiscal firepower” to prevent the UK tax burden from increasing to a record high (as a share of national income). This result is expected to be the case no matter the reforms proposed in the upcoming Spring Budget.[28]

The Office for National Statistics (ONS) reported that Britain’s public sector net debt stood at 96.5% of GDP at the end of January 2024. This is the highest level seen since the early 1960s and is a stark contrast to the lows of the 1990s when the debt-to-GDP ratio fell to 22%. For further perspective, the ratio hovered around 80% in the decade following the 2008 financial crisis.[29] Public spending is forecast to decline from 44.8% of national income to 42.7% in 2028-29. Despite this, tax revenues are set to increase to 37.7% within the same time frame which is more than the 33% figure recorded on the eve of the COVID-19 pandemic and the highest since the end of World War Two.[30]

Paul Johnson, director of the IFS, commented that this will greatly affect the legacy of the current Conservative government.  “This parliament will be looked back on as the point at which all this burst out,” he stated. Even though he acknowledged that any government would face similar issues, he affirmed that “we will look back on this period as one where the British state, after a long period of stability, actually grew by 3 or 4 per cent of national income”.[31] Alongside the tax burden, the Financial Times reports that the legacy is to be one of an increase in the size of the state, the cost-of-living crisis, unsustainable public sector austerity, and renewed defence spending.[32]

The IFS calculated that the Chancellor would need to procure £35bn of cuts from already-strained public services if he wishes to use the headroom to pay for tax giveaways before the next general election. Such an increase from an expected £15bn of headroom to an estimated £50bn over the next five years would come at a high cost. The IFS report states: “the economic case for tax cuts is weak. The public finances remain in a poor position.”[33] As such, the thinktank urged the government to replace its vague pledges with more certain plans on how savings could be achieved.

Further reductions are likely to be difficult and require a great deal of hardship. Westminster has promised to boost childcare subsidies and protect finances for the NHS, international aid, schools, and defence. It is, therefore, expected that a new round of austerity would hit “unprotected” ministries such as the Home Office, and the departments for justice, transport, and higher education.[34] Hunt is thought to be considering a further reduction in the overall increase in Whitehall spending. The Guardian reports that he may want to decrease the figure from 1% above inflation to 0.75% or even 0.5%.[35]

The rise in the tax burden, however, is still forecast to occur. It reflects the 2021 increase in the Corporation Tax rate, the freeze in most personal tax thresholds for several years and underlying economic shifts that have skyrocketed the tax take. These factors have only partly been offset by the recent cut in National Insurance contributions. Even if Hunt announces a £7bn cut in Income Tax, as some economists speculate, it would be far outweighed by the continued personal tax thresholds freeze. The unchanging thresholds would raise £44bn per year by 2027-28.[36]

Vital sectors such as local councils and courts and prisons, will see their funding decrease unless the next government tops up spending by £20bn. If the country’s population grows in line with the latest ONS projections, public spending per capita will be even less. The “unprotected” departments could face cuts of 4% (or £25bn) per year.[37]

Paul Johnson further warned: “there are huge backlogs in the justice system, local authorities going bust right, left and centre, huge waiting lists in the NHS, universities genuinely starting to struggle with 10 years of frozen income and a social care system that is struggling and dependent on immigration… it’s not a realistic conversation.”[38]

Meanwhile, a Treasury spokesperson said: “our responsible action with the public finances meant we could cut taxes for working people and businesses in the autumn statement. We will not comment on speculation over whether further reductions in tax will be affordable in the budget.” They also added that the Treasury is “on track to meet our fiscal rules, and total departmental spending will be £85bn higher after inflation by 2028-29 than at the start of this parliament, including record funding for the NHS.”[39]