A new UK government has come to power in July 2024. Will this spur the nation into a new period of revitalised growth? What might a Labour administration mean for your finances and wealth in 2024-25?
Below, our Teesside financial planners take a closer look at the data and what it could mean for your household in the coming months. We hope these insights are helpful. Please contact us for more information or to speak with a financial adviser:
t: 01228 210 137`
e: [email protected]
The UK economy so far in 2024
How was the economy performing before Keir Starmer replaced Rishi Sunak in Number 10 on 5 July 2024? Already, the new Chancellor, Rachel Reeves, has cited “the mess” left by the previous government, leading to her call for an urgent assessment of spending.
Judging the UK’s economic performance so far in 2024 depends heavily on the variables you concentrate on. Economists generally look at five main “macro goals” when considering how well a government is progressing towards its objectives:
Strong and sustained growth (as measured by growth in GDP, or gross domestic product, the total measure of economic output in an economy).
- Low and stable inflation (about 2%).
- Balanced trade (i.e. not too high a reliance on imports or exports).
- Low unemployment and high employment.
- Fiscal responsibility (spending is not running away from tax revenues without borrowing too much).
In 2024, there have been some signs of improvement in the first two. GDP growth was forecasted at 0.6% for 2024 (stronger than the 0.1% achieved in 2023), and inflation is back down to the Bank of England target of 2%.
However, growth remains paltry compared to historical figures (Tony Blair achieved 3% GDP growth or more during the late 1990s). The post-Covid economic inactivity rate is still high at 21.9%, and the national debt stood at 98% of GDP at the end of 2023.
Will Labour turn things around?
Labour seems to be focusing on growth to address the UK’s economic challenges. It was a central theme in the King’s speech. If GDP accelerates, then national debt as a percentage of national income starts to fall. More growth also fuels job creation and consumer spending, translating into more tax revenues, which could help balance the books.
However, the government seems to be laying the ground for tough fiscal policy decisions, remaining in “campaign mode” by continuing to attack the Conservatives for the state of the public finances. The IFS (Institute for Fiscal Studies) claims that tax rises will be hard to avoid over the next five years despite the UK already facing the highest tax burden since the Second World War.
It is difficult to imagine how the new government will achieve “more than subdued” GDP growth when many of the same national issues remain – e.g. an ageing population, low productivity, poor investment and high interest on public debts.
What does this all mean for households?
The possibility of higher taxes in the coming years cannot be dismissed. However, building a financial plan based on what “might happen” would be foolish. Rather, it makes more sense to craft a flexible strategy which allows maximum adaptation if the policy environment shifts.
The new Labour government has promised no further increases in VAT, income tax, or National Insurance (NI). However, fewer firm commitments have been made in other areas of taxation, such as capital gains, dividends and council tax.
What is more certain is the continuation of the income tax “freeze” until April 2028. This means more workers will pay higher tax rates as their wages increase over the next three tax years (e.g. pushing them from the 20% Basic Rate into the 40% Higher Rate).
If your earnings are nearing a higher marginal rate, it may be worth seeking financial advice. Different options could help you mitigate the impact of a “stealth tax” on your finances, such as exploring salary sacrifice with your employer. Or re-structuring your salary-dividend ratio if you are a company director.
Staying confident in a shifting landscape
Nobody has a crystal ball to determine what will happen with the economy. However, we can make educated and realistic predictions based on reliable data. This, in turn, helps financial planners craft plausible scenarios for their clients, facilitating the preparation process.
We can be fairly confident that the UK’s national debt will need to be addressed soon. By the end of the 2020s, the UK may spend more than £122bn per year on debt servicing – nearly double our defence spending. To avoid a fiscal reckoning, the government will almost certainly need to cut spending, raise taxes, or both.
The era of “near-zero” interest rates is also likely over for the foreseeable future, despite falling inflation rates in 2024. The knock-on effect could be higher mortgage costs for homeowners over the coming years, eating up a higher percentage of disposable income.
Pensioners owning their homes outright may have more net benefits (e.g., higher regular savings rates and annuity rates). However, potential cuts to public services to rebalance the economy could add further pressure to the NHS and social care provision.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.