Chancellor Reeves Unveils £40 Billion Budget

31. Okt.

Chancellor Rachel Reeves outlines a transformative budget aimed at addressing the UK's £40 billion fiscal gap through strategic tax increases while committing to public service growth.
Here are the key highlights: (Source: The Guardian, FT)
Main Tax Changes
Overall Tax Increases: The budget introduces £40 billion in tax hikes, primarily targeting higher earners and corporations to fund public services and infrastructure.
Income Tax and National Insurance (NI) Thresholds: The thresholds for income tax and NI will be frozen for an additional five years, which is expected to push more individuals into higher tax brackets as their earnings increase.
Capital Gains Tax (CGT): Starting April 6, 2024, the annual exemption for CGT will decrease from £6,000 to £3,000. Additionally, the capital gains tax rates will be adjusted, with the lower rate increasing to 18% and the higher rate rising to 24%.
National Insurance Contributions: Employer NI contributions may rise from 13.8% to 15.8%, alongside a reduction in the threshold at which they apply, dropping from £9,100 to £5,000. These changes could potentially generate an additional £20 billion in revenue.
Inheritance Tax: The current structure remains, but potential alterations to exemptions affecting businesses and agriculture are under consideration.
Non-Dom Tax Status: The government is contemplating the complete abolition of the non-dom status, which allows certain UK residents to avoid UK taxes on foreign income.
'Sin' Taxes: There are proposals to increase taxes on the gambling industry by up to £3 billion, aimed at addressing addiction issues.
Spending Measures
Public Spending Growth: Spending on public services is set to increase by 1.5% in real terms, reflecting a commitment to enhance essential services despite fiscal constraints.
NHS Funding: A significant portion of the budget includes a £22.6 billion increase for the NHS to improve healthcare services.
Investment in Local Services: An allocation of £240 million will be directed toward local services to address community needs and infrastructure improvements.
New Minimum Wage Rates
National Living Wage (NLW): The NLW will increase to £12.21 per hour, reflecting a 6.7% rise. This adjustment is expected to benefit over 3 million low-income workers, providing an annual increase of approximately £1,400 for full-time employees.
Market reaction after Budget
The yield of the 3-M Glit slightly increased after the Budget but did not rise as sharply as following the Liz Truss mini-budget. The market appears less panicked this time, likely because it had more time to digest the situation after PM Starmer's repeated comments about a painful budget, which helped ease sentiment. This will not compel the Bank of England to rush into rate cuts or quantitative easing.

The weekly chart indicates that the FTSE 100 may experience a false breakout, as suggested by the wedge formed by the red line. The index has recently rejected resistance at the green line. If the FTSE falls below the short-term support line (blue), it will likely test 7052, which represents a 38.2% retracement from the low in March 2020 to the high in May 2024.
Conclusion

The Budget is expected to raise business operational costs, particularly labour costs, due to tax increases affecting corporations and National Insurance contributions. It remains to be seen whether more millionaires will leave the UK. Additionally, the capital gains tax is likely to reduce landlords' interest in purchasing rental properties, which may impact the property market by decreasing demand for new homes and increasing rents.