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March 5, 2024

Pre-Budget Outlook

Ahead of tomorrow’s UK Spring Budget by Chancellor Jeremy Hunt, we have compiled a number of charts showing the current state of play in the UK economy, looking at areas such as the level of Government borrowing and tax revenues, headwinds to investment in the construction sector and sustained pressure on the National Health Service following the Covid-19 pandemic.
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Will Peters
,
Director Business Development - UK
Macrobond
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Artur Kulinski
,
Sales Associate
Macrobond
In-house blogger
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Kevin Fang
,
Product Specialist
Macrobond
In-house blogger
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Paul Saksik
,
Commercial Graduate
Macrobond
All opinions expressed in this content are those of the contributor(s) and do not reflect the views of Macrobond Financial AB.
All written and electronic communication from Macrobond Financial AB is for information or marketing purposes and does not qualify as substantive research.
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UK Government net borrowing

This chart shows UK Government net borrowing tracked against net borrowing as a percentage of GDP. As the UK Government approaches the Spring Budget, its net borrowing position remains a focal point, balancing between economic recovery efforts and maintaining fiscal responsibility. The government faces the challenge of supporting public services and stimulating economic growth while managing the national debt and responding to external economic pressures. 

G10 tax revenue as percentage of GDP

Compared to its global peers in the G10, the UK has the eighth highest tax burden, according to data from the OECD. France’s leading position reflects its extensive public sector and social welfare programmes, which are partly funded by higher taxation, followed closely by Norway and Italy as a function of their comprehensive social services and public pensions. The UK’s middle-ranking position highlights the balance the Government attempts to strike between funding public services and maintaining a competitive tax regime. The US and Switzerland’s positions reflect their attempts to create a business-friendly environment while tightly controlling public spending.  

UK Government expenditure contribution to GDP growth

The UK Government's expenditure plays a crucial role in fuelling GDP growth, serving both as a direct injection into the economy and as a catalyst for private sector activity. Through investments in public services, infrastructure, and targeted support for businesses, government spending aims to stimulate economic recovery and resilience.

This chart shows how the stable picture of government spending contribution to GDP was temporarily distorted by the Covid-19 pandemic. This led to a spike in 2020 followed by a sharp drop reflecting a reduction in expenditure as the economy started to recover, before reverting to the previous trend. 

Investment headwinds in construction

The rapid rise in interest rates has affected the output of new housing construction. A stable trend in construction came to an abrupt halt in 2020 due to the impact of Covid-19. The shaded area and highlighted 25 per cent fall show a substantial drop in new housing outputs, coinciding with a steep decline and volatility in interest rates. The key takeaway from the chart is that rising interest rates are a significant headwind for construction investment, affecting output levels. 

The shortage of new homes has lowered affordability for those trying to get on the housing ladder and increased rents. Resetting the dynamics of the housing market is the biggest challenge facing the property sector. Options for the Chancellor include stamp duty reforms or holidays and alternative mortgage products for first time buyers. Housing supply issues are also being hampered by planning hurdles. The Government may need to look at using green belt land, for example by focusing on less environmentally sensitive areas of the green belt.

VAT receipts at all time high

VAT, the most recessive form of tax as it does not discriminate by wealth or income, has been steadily rising in the UK, and is now over six per cent of GDP on an annual basis. Successive governments have seen VAT receipts increase (Covid-19 and the global financial crisis excluded) with consumption. This is very much associated with the cost-of-living crisis and the squeeze on living standards that have been behind the recent recession.

Demand on hospital tests is ~50% higher since Covid-19

Pressures on the National Health Service have increased since the Covid-19 pandemic following a steady rise reflecting an ageing population and advances in medical technology. The shaded area beginning in 2020 highlights the period when Covid-19 became a global health crisis, requiring comprehensive testing of the population. The reasons for the increased demand in hospital tests since the pandemic include the need for ongoing Covid-19 related tests, catching up on delayed diagnoses and the need to manage the long-term health consequences of the disease. The heightened level of testing suggests that the pandemic is likely to have a long-term impact on health demand.  

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