Spring Budget 2024 - Driving investment for long-term growth is crucial for the UK economy

The UK economy is flatlining and is 10% smaller than it should be. The country needs a Budget for growth not for votes. It won’t get it.

His Spring Budget speech on 6 March will see the Chancellor trying very hard to pull some rabbits out of the hat to appeal to his backbenchers and his supporters in the media. He will want to try and convince a sceptical public that taxes are coming down and the UK economy is ‘turning a corner’. The reality is that, like any good magician, he will be selling an illusion.

While we might see a small cut in income tax or national insurance, or an increase in IHT rates that could create a short-term blip in popularity, the reality is that thanks to fiscal drag the overall level of taxation paid by middle-income UK taxpayers will remain at its highest for more than 70 years.

Most economists would agree the Chancellor’s wriggle room is limited at best unless he goes down the route of significant cuts to public spending. He is truly stuck between a rock and a hard place.

Away from the Westminster bubble, the reality is that the UK economy is on life support and has been for four years. If the UK had maintained the sort of growth rate achieved between 2010 and up to the outbreak of COVID, we could have expected the economy to be about 10% bigger than what it is today.

By now it desperately needs a shot of adrenaline to drive investment as the engine for growth or face a possible case of economic hysteresis – the longer it takes for the patient to get better, the harder it will be to really get well.

Productivity improvements and growth have flat lined. This has far-reaching implications for all of us in terms of future living standards, government tax revenue, and support for public sector budgets.

So, what should this and the future government, who will face very similar challenges, do to jump start growth?

The Chancellor should do the decent thing, ignore any short-term political gains, and set out a 10-year business growth plan to reverse half a decade of stagnation. Certainty and long-term are what the country needs now, not short-term political posturing.

Central to this is cutting corporation tax by 5% to stimulate business growth and investment from UK and overseas businesses. It wouldn’t be as politically popular as a 2p cut in income tax, but it will have a far wider and longer-term impact on the health of the nation’s finances, necessary to fund rising public sector costs and, yes, eventually to pay for income tax cuts.

Allied with this, we are recommending the re-introduction of super deductible capital allowances as the former Chancellor introduced during COVID, but this time on steroids. Again, to stimulate investment and growth at far less cost than expensive income tax cuts. The policy would pay for itself given the likely spend on capital equipment and infrastructure.

While this will very much be a budget for votes, the UK economy needs a budget for solid, sustainable economic growth this March, and other Budgets to come.

For more insights on potential measures from the Chancellor in his Spring Budget, view our full Wishlist article