Welcome to our first economic update of 2024 – a year in which a general election looks likely, possibly “in the second half” of the year, according to the Prime Minister.

Polls suggest that, for the majority of the public, the economy is among the most important issues facing the country.

This Insight looks at what the early economic data of 2024 says about the state of the economy and how the Government and Bank of England might respond.

National Insurance rates down but thresholds frozen

The Government started the year by cutting taxes for employees. For around 27 million workers, the main rate of employee National Insurance contributions (NICs) fell from 12% to 10% on 6 January 2024. An employee earning £35,400 will pay £450 less in NICs a year as a result. For 2 million self-employed people, the rate of NICs they pay on their profits will fall from 9% to 8% from April 2024.

However, freezes to tax thresholds mean that personal taxes will be higher in April than they would otherwise have been because of ‘fiscal drag’. Income tax and National Insurance thresholds are being frozen for the third year of a six-year freeze; without the freezes the thresholds would rise with inflation. The freezes won’t be as obvious in pay-packets as the NICs cuts, but they mean that more people are brought into income tax, or into paying tax at a higher rate, than if the thresholds increased with inflation.

The Resolution Foundation, a living-standards think tank, estimates that employees who earn less than £26,000 a year will be worse off or unaffected (PDF) by the combination of the NICs rate cut and the threshold freezes in 2024/25. Those earning above £26,000 will gain, and those earning £50,000 will gain the most.

Does lower government borrowing increase the chance for tax cuts?

When the Government spends more than it receives in taxes and other receipts, it borrows. Commentators have speculated that lower-than-expected government borrowing in the first nine months of 2023/24 might make tax cuts more possible. The Prime Minister and Chancellor have suggested that they want to introduce more tax cuts, and their next opportunity will come at the Budget on 6 March.

The Government borrowed less in the first nine months of 2023/24 than the Office for Budget Responsibility (OBR) forecast in November 2023, largely because of lower debt interest payments. Inflation was lower than expected and a significant amount of government debt interest payments are linked to inflation.

But, as Tom Joseph of the OBR points out, these provisional monthly borrowing figures are volatile (PDF) and should be treated with caution. Stepping back, borrowing remains relatively high and the Government is borrowing more than during 2022/, as shown in the chart below.

This graph shows cumulative government borrowing in April to December 2022/23 and April to December 2023/24. Government borrowing in April to December 2023/24 was £11 billion higher than in the same period of 2022/23, but £5 billion lower than the OBR forecast in November 2023.
Source: ONS. Series J5II; OBR. November 2023 Economic and fiscal outlook monthly profiles.

The Chancellor can cut taxes regardless of whether borrowing is a little lower or higher than forecast. It’s all about choices and trade-offs. The Chancellor could borrow more, spend less, or increase other taxes (or a mixture of the three) to fund tax cuts.

He might also be lucky; if the OBR forecasts a better outlook for the public finances and lowers its forecast for government borrowing, the Chancellor could do what he and recent his predecessors generally have done (PDF) and spend the windfall.

Tax revenues are forecast to be larger at the end of this Parliament than at the start of it, relative to the size of the economy. Policies (such as threshold freezes) and growth in the things that are taxed (such as incomes) have contributed to tax revenues growing, as shown in the chart below.

This graph shows national accounts taxes, as a % of GDP, broken down between income tax, NICs, VAT, onshore corporation tax and other taxes. Data are shown for 2019/20, 2022/23 and 2024/25. Taxes are forecast to be 3.9% of GDP higher in 2024/25 compared with 2019/20. Income tax revenues are forecast to be 10.6% of GDP in 2024/25, compared with 8.6% in 2019/20. Onshore corporation tax revenues are forecast to increase from 2.2% of GDP in 2019/20 to 3.8% in 2024/25.
Sources: OBR. Public finances databank – December 2023.

Inflation set to fall during 2024

Prices grew quickly during 2023. Such high inflation affects the affordability of goods and services for households. The inflation rate generally slowed as 2023 went on, bringing some respite to household budgets.

The Consumer Price Index (CPI) rose by 4.0% in the 12 months to December 2023, up from 3.9% in November. This is the first increase in the annual inflation rate since February 2023. The largest contribution to December 2023’s inflation came from alcohol and tobacco prices, which was largely because of an increase in tobacco duty.

Most economists expect that inflation will fall in 2024 due to lower energy prices and reduced inflation in consumer goods and food. Household energy prices are expected to fall in April 2024.

Of course, there are still risks that the rate of inflation could increase. For instance, recent disruption to shipping traffic in the Red Sea and Suez Canal has highlighted the potential for conflict in the Middle East to affect the world economy. There is more information on this disruption in the Library briefing UK and international response to Houthis in the Red Sea 2024.

The Bank of England will set interest rates on 1 February

The Bank of England’s Monetary Policy Committee (MPC) sets the Bank’s main interest rate. It has held the interest rate at 5.25% since August 2023, having repeatedly raised rates since December 2021 in an attempt to control inflation.

The results of the next MPC meeting will be announced on 1 February. It’s widely thought that the MPC will keep interest rates at 5.25% for the time being and that rates will fall during 2024, possibly from May.

The MPC will want to see signs of falling inflationary pressure before it cuts interest rates. It will see mixed messages from the latest data. According to the Office for National Statistics (ONS), annual growth in nominal average earnings slowed in the period September to November 2023 but remains at one of the highest rates for decades.

Measures of underlying inflation, such as core and services inflation, remain relatively high, as shown in the chart below.

This image has two graphs showing two different measures of inflation from 2021 to 2023. The measures are core inflation and services inflation. Both increased during 2021 and 2022. Both rates of inflation began falling during 2023. Core inflation remained in 5.1% in December 2023, which is the same rate as in November 2023. Services inflation increased a little to 6.4% in December 2023.
Sources: ONS, CPI inflation, series DK08 (core) and D7NN (services)

About the author: Matthew Keep is a researcher specialising in the public finances at the House of Commons Library.

Image by: Credit: fazon on Adobe Stock

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