UK Economy Update Winter 2024 with Geoff Riley

Summary

In this update on the UK economy for December 2024, Jeff discusses key points from Rachel Reeves' October budget, including increased taxation, spending, and government borrowing. He highlights a rise in employer National Insurance, alongside rising inflation and its impact on wages and household debt. Despite slower growth forecasts and fragile consumer confidence, Reeves' government aims for a budget surplus by 2029. Jeff also addresses the global economic shift towards developing nations and the potential effects of Trump’s tariff plans on the UK economy in 2025.

Takeaways

• 😀 In October 2024, UK Chancellor Rachel Reeves announced a budget involving a £70 billion increase in public spending, financed by a £40 billion tax hike, marking the largest tax increase in 30 years.
• 😀 The most significant tax increase in the 2024 budget was a 1.25% rise in employer National Insurance, with the total government borrowing set to rise to £128 billion before reducing to £71 billion by the end of the decade.
• 😀 The UK government plans to achieve a current budget surplus by 2029, meaning tax revenues will cover current spending by that year.
• 😀 Despite pressures in the UK economy, the government has committed to remaining outside the European Union, rejecting a return to the single market, customs union, or freedom of movement.
• 😀 Income tax, VAT, and National Insurance are the three biggest sources of tax revenue in the UK, with income tax accounting for over £300 billion annually.
• 😀 The global economy is shifting toward emerging markets and developing nations, which now contribute nearly 60% of world GDP, with China becoming the largest economy in terms of purchasing power parity (PPP).
• 😀 The UK's economic growth has been sluggish, with the Office for Budget Responsibility estimating a potential growth rate of just 1.7% per year, posing challenges for the Labor government to drive faster growth.
• 😀 Inflation has largely stabilized, returning to target levels of around 2% by 2025, but the economic shock of recent years still lingers, affecting both consumers and businesses.
• 😀 The UK is facing a growing tax burden, with the overall tax-to-GDP ratio expected to climb to 42%, alongside rising national debt, which now stands at 100% of GDP.
• 😀 The UK government faces high debt servicing costs, with interest payments on national debt consuming 2.5% of GDP, putting pressure on future fiscal policy and economic growth prospects.

Q & A

What were the key points of Rachel Reeves' first budget announcement in October 2024?

Rachel Reeves' first budget included a £70 billion increase in government spending, partly financed by a £40 billion increase in taxation. The largest tax increase was a 1.25% hike in employer National Insurance. Additionally, government borrowing was set to rise to over £128 billion in 2024 before gradually reducing to £71 billion by the end of the decade.

What impact did the increase in National Insurance have on businesses?

The 1.25% increase in employer National Insurance particularly affected labor-intensive businesses, such as those in tourism and hospitality. It also lowered the weekly wage threshold at which National Insurance is paid, further increasing the burden on businesses with a significant number of employees.

How does the UK's economy compare to the global economy, particularly in terms of GDP share?

In 2023, the UK economy accounted for just over 2% of global GDP, placing it eighth in the world. Emerging and developing countries make up nearly 60% of global GDP, while China, India, and Japan have significantly larger shares of the global economy than the UK.

What is the UK's potential growth rate, and what challenges does it face in achieving higher growth?

The UK's potential growth rate is estimated to be 1.7% per year. To achieve higher growth, the government would need to focus on improving productivity and expanding the labor force, which could prove challenging given current economic conditions.

How have inflation and wage growth affected UK households in recent years?

Inflation, particularly during 2022 and 2023, severely impacted household spending power. While wage growth increased nominally, real wages (adjusted for inflation) fell during the same period. This, combined with a higher tax burden, led to reduced disposable income for many households.

What are the long-term implications of the UK's increasing tax burden?

The UK government's tax burden is expected to rise to 42% of GDP by the end of the decade, a level not seen since World War II. This could impact both consumer confidence and business investment, as higher taxes may limit disposable income and business growth opportunities.

What is the significance of the UK government's borrowing and national debt?

The UK government's borrowing is projected to exceed £128 billion in 2024, with national debt now exceeding 100% of GDP. This borrowing has resulted in high debt interest payments, which could limit the government's ability to invest in other areas of the economy.

What role do international trade tensions play in the UK economy's outlook for 2025?

The potential implementation of higher tariffs under the Trump Administration, especially on Chinese goods, could hurt global trade, including the UK's already slow growth rate. This could exacerbate existing challenges for the UK economy, particularly if tariffs affect key trade partners.

How are household debts impacting UK consumers in 2024?

UK households are facing high levels of debt, with over £1.5 trillion in outstanding mortgages and high interest rates on other loans. Credit card and overdraft debt are particularly costly, with interest rates ranging from 7% to 35%, straining household finances.

What are the key economic concerns for 2025 in the UK?

Key concerns for 2025 include high government debt, rising taxation, fragile consumer confidence, and the potential impact of external factors such as global trade tariffs. Although inflation and interest rates are expected to come down, the outlook for strong economic growth remains uncertain.