Leading UK economist Professor Trevor Williams casts his eye over Jeremy Hunt’s first full budget.
Today's UK budget is called 'the budget for growth' with the four E's of enterprise, education, employment and everywhere. The chancellor, Jeremy Hunt, heavily trailed the latter in a speech he made at Bloomberg's offices in January.
Many of the proposals in the budget were as expected and had been already shared with the media. In other words, there were no surprises. The government did not want any repeat of the debacle of the Liz Truss government's September 2022 ‘mini budget’.
Today's announcement contained lots of small measures, underpinned by a much better economic outlook produced by the OBR. The gains from a better fiscal position are retained over the forecast period, leaving the potential for up to £30bn or so of tax cuts ahead of the next general election.
The big picture
The biggest economic news was that the OBR's economic assumptions had changed significantly, moving from a contraction of 1.4% expected in November to one of just 0.2%. They also raised next year's growth forecast to 1.8%.
That allowed the chancellor some fiscal room to see the budget deficit fall as a share of GDP every year to 2027, when it is expected to be under 2%. The debt-to-GDP ratio is still higher compared with forecasts made a year ago, but is significantly declining, albeit on a lower trend compared with November 2022.
The OBR is now forecasting that consumer price inflation (CPI) will fall to 2.9% by the end of 2023, from 10.7% at the end of 2022. That has implications for interest rates, which now look as if they are close to a peak. It means the Bank of England may have to revise its economic forecasts, which are markedly more pessimistic than the OBR’s.
But for households, it is still bad news. Adjusted for price inflation, incomes will see a cumulative fall of 5.7% in 2022-2023 and 2023-24. The cost-of-living squeeze has not been mitigated in this budget, and it's the largest fall in living standards since the 1956-57 fiscal year.
What does this mean for financial markets? It should mean good news for bond markets. Less inflation and the likelihood of lower interest rates should bring down borrowing costs for businesses and households, which should help support equity markets.
For the pound, it's mixed. On the one hand, lower interest rates may make it less attractive. But faster economic growth, as forecast by the OBR, should increase the stability of the UK and make sterling assets a better, safer bet, especially with the fiscal profile being on such an even keel.
The notable measures were:
Pension annual tax allowance increased from £40,000 to £60,00, and the abolition of lifetime allowance, previously £1.1m.
There were announcements to bring more retired and inactive into the workforce, through changes to disability allowance rules, new types of apprenticeships targeted at the over the 50s (called “returnerships”), and targeted employment advice for those on Universal Credit.
With no explicit policies to increase migration, the chancellor effectively had no choice but to focus on improving or raising the UK's participation rate to expand those in the labour force and reduce inactivity rates.
There was an announcement of 30 hours of free childcare for every single child and a 30% increase in childcare renovation rates for nursery providers.
The corporate tax rates increase in April (to 25%) will go ahead, although the chancellor pointed out that on their analysis, only 10% of companies will pay it. That begs the question of why bother doing it.
The 'super deduction' created by then-chancellor Rishi Sunak will be replaced by full capital expensing for the next three years. This means the full cost of investment can be taken off gross profits. It is expected to cost about £9bn a year, totalling £27bn. It is dropped after three years as it would otherwise have meant the chancellor breaking one of his fiscal rules. By then, Hunt or his successor will be hoping growth will have kicked in and they'll be able to extend it or introduce a new measure.
There was a lot of focus on the energy sector. As expected, the price gap cap will remain at £2,500 for three additional months. Also, as expected, the increase in fuel duty of 11p has been cancelled for this fiscal year.
Interestingly, there was a lot about modular designs for nuclear reactors and the support that the government will offer in terms of research into its efficacy and support of the nuclear industry in general. It means the nuclear industry will be able to access the same investment incentives as renewable energy.
With the commitment to electricity generation of 25% from nuclear by 2050, it has been designated as a ‘clean fuel’ alongside renewables such as wind and solar panels. That will make achieving the UK net zero target by 2050 easier.
As expected, there was an announcement on 12 new Investment Zones. These 12, spread across in the UK, will see relatively small amounts of money being dispersed to local regeneration projects and some new announcements about levelling up partnerships.
Defence spending is expected to be 2.25% of GDP over the next three years, with an additional £11bn, according to the chancellor, over the next three compared with previous plans.
The big picture is that the growth outlook is absorbed into improved fiscal projections. Gains from the reduction in fuel prices and the increase in government revenues from the higher VAT and tax receipts are going to be ploughed back into reducing the fiscal deficit over the coming five years. This will be a relatively tight fiscal ship.
The chancellor has opted for stability and, if successful, has left open the prospect of some potential tax giveaways ahead of any election in 2024.
Professor Trevor Williams is the former chief economist at Lloyds Bank Plc. He runs a research consultancy TW research and is a co-founder of currency risk manager FX Guard. He is also visiting professor at the University of Derby.