Jeremy Hunt delivered his Spring Budget this week. The announcement took place against a backdrop of financial market nervousness, the continuing conflict in Ukraine and concerns about the long-run effects of Covid-19. Although this latest fiscal event appears to represent a return to sensible policy, many significant economic challenges remain.
Newsletter from Friday 17 March
On Wednesday this week, the chancellor of the exchequer, Jeremy Hunt, delivered his Spring Budget in the House of Commons. This was his second speech since taking the job at the Treasury last year, in the aftermath of Liz Truss and Kwasi Kwarteng’s chaotic mini-budget.
Back in September, Kwarteng’s fiscal event plunged the UK’s financial markets into turmoil, with several pension funds saved from collapse only by a rapid-response intervention from the Bank of England.
Six months on and followers of the FTSE 100 – an indicator that tracks the value of the top 100 publicly listed UK companies – are again watching with concern. A week ago, Silicon Valley Bank (SVB) went under. This was the largest US banking collapse since Lehman Brothers in 2007. SVB’s UK subsidiary soon followed, with HSBC coming to the rescue and offering to bail out SVB UK on Monday. Credit Suisse has also run into serious trouble, and may require support from both the Swiss National Bank and the European Central Bank (ECB) to stay afloat.
Figure 1: SVB share price (US $), 2018-2023
Source: S&P Global, Turner (2023)
But rather than unleashing uncertainty on the market, and fuelling the crisis, this week the chancellor positioned himself as a voice of calm and stability. SVB was mentioned in passing, but no more than that.
This was billed in advance as a ‘boring’ budget, with the government keen to assure the public that the UK economy is in safe hands. The goal of the speech was to highlight the progress made in relation to the three economic components of prime minister Rishi Sunak’s five-point plan for 2023: to halve inflation, grow the economy and reduce public debt.
But what did this budget announcement actually contain?
Pensions, pints and pools
On taxation and income, the government is set to abolish the amount that workers can accumulate in pensions savings before having to pay additional tax. This policy will be particularly beneficial for those likely to accrue more than £1 million in their pension pot. On a related note, the tax-free yearly allowance for pension contributions is to rise from £40,000 to £60,000 – having been frozen for nine years.
Adjustments have also been made to fuel duty (5p tax cut maintained for another year), alcohol (with tax to rise in line with inflation but with relief for beer, cider and wine sold in pubs) and tobacco (to increase above the rate of inflation).
Turning to energy, the big news was that government subsidies limiting typical household energy bills to £2,500 per year will be extended for three further months, up until the end of June 2023. There will also be a £200 million support package to bring energy charges for households with pre-payment meters into line with prices for customers paying by direct debit. The chancellor also announced a £63 million fund to help leisure centres struggling to afford to heat their swimming pools.
Beyond the current energy crisis, Hunt announced a new commitment to invest £20 billion over next two decades in low-carbon energy projects, with a focus on carbon capture and storage. Similarly, nuclear energy is to be classed as ‘environmentally sustainable’ for investment purposes, with the goal of attracting more funding, including public money.
Further measures announced this week include confirmation of the increase in corporation tax from 19% to 25% – a move that has been discouraged by experts at the National Institute for Economic and Social Research (NIESR). Firms will be able to deduct investments in new machinery or technology (what economists call ‘capital investment’) from their taxable profits. There will also be tax breaks as part of 12 new ‘investment zones’, as well as attempts to cut red tape at trade borders.
Another eye-catching announcement was the chancellor’s commitment to reforming UK childcare. From April 2024, the government will offer 30 hours of free childcare per week for working parents in England for one- and two-year-olds. Families on universal credit will receive childcare support upfront instead of in arrears, with the £646-a-month per child cap raised to nearly £1,000.
But the UK’s childcare crisis is not just on the demand side. There is also an acute labour shortage driving up prices for nurseries and nannies. In response, the government will introduce £600 ‘incentive payments’ for those becoming childminders, and has relaxed rules in England, allowing staff to look after more children at once.
The chancellor’s hope here is that reducing the pressure on parents of young children will mean that they return to work sooner, easing the wider labour market challenges in the UK.
Related measures have also been announced with this goal in mind. The government plans to introduce tougher requirements for jobseekers as well as increased job support for lead child carers on universal credit; launch a new ‘returnership’ programme for over-50s seeking employment; and relax immigration rules in the construction sector. How the latter fits in with the Home Office’s controversial ‘Illegal Immigration Bill’, and the prime minister’s pledge to ‘stop the boats’, remains to be seen.
Recession? Not quite
In contrast with his predecessor, the chancellor cited the latest forecast from the Office for Budget Responsibility (OBR) during his speech on Wednesday. Their figures were the benchmark from which he delivered his plans and were bolted on directly to Sunak’s various targets.
Starting with growth, according to the OBR, the UK is set to avoid a ‘technical recession’ in 2023 but will still shrink by 0.2% over the year. This means things are bad, but not quite bad enough for the dreaded ‘R-word’. Over the medium term, there are grounds for cautious optimism, with GDP growth of 1.8% predicted for next year, 2.5% in 2025, and 2.1% in 2026.
On inflation, the UK’s consumer price index (CPI) is predicted to fall to 2.9% by the end of the year, down from almost 11% in the last quarter of 2022. This means prices will still be rising, but not at such a staggering rate.
Finally, on public debt (the burden of which is being eased by persistent high inflation), the OBR have forecast the debt-to-GDP ratio to be 92.4% this year, rising slightly to 93.7% in 2024.
Was this the boring budget we were promised? It was certainly lengthy. The chancellor’s speech confirmed a series of announcements that had trickled out into the press during the preceding week (such as the three-month extension to the EPG and the increase in child support). It will have its critics on both sides, as well as its supporters.
But for many, what this budget will be judged on is that extent to which it represents a return to sensible policy. In comparison with last autumn’s incendiary fiscal event, it does at least seem relatively mainstream. It is also clear that the forecasts from the OBR played an important part in Hunt’s calculations. And yet, troubling times lie ahead. The international banking system is twitching after the fall of SVB and the Credit Suisse bailout. Putin’s war threatens to keep fuel prices high and grain exports low. And longer-run scarring from Covid-19 – both here in the UK and further afield – means policy-makers will need to remain adaptable. By the time the next budget comes round this autumn, who knows where we’ll be?