Jeremy Hunt has unveiled his much anticipated Spring Budget to much analysis and discussion throughout the country. After the political turmoil of 2022, the fact that Mr Hunt has survived to deliver a second financial statement is generally seen as a positive by the wider business community. This is not necessarily due to political ideology but rather due to business’s need for stability.
After two of the most tumultuous years since the Second World War, that have seen unprecedented upheaval in the business environment, a degree of stability and predictability is desperately needed for UK businesses.
A foundation for growth is vital to an economy that has remained stagnant since the World Banking Crisis and seems to be a key target for the Sunak government. The Prime Minister, Rishi Sunak, has set ambitious economic goals, including halving inflation and the UK having the strongest growth in the G7, and with a general election starting to loom in the distant horizon, these process of delivering on them needs to start now.
Whilst the UK private sector is crying out for investment and love from the budget the UK also faces major social issues that need to be addressed, and that are receiving more coverage in the press. Inflation, cost of child care and soaring energy bills are some of the issues affecting the British public. With a general election looming and the majority of Britain feeling the squeeze, the Spring Budget will need to reassure the British peoples that the government is aware of the issues they face and go towards alleviating some of the pressures being felt in a more direct and instant manner.
So has the Spring Budget set the UK on the road to an economic renaissance and closer to delivering on Sunak’s promises? Has the cost of living fall and inflation been brought into line?
Below we will look at the key points from the Spring Budget.
It must be pointed out that of the 190+ measures introduced in the Spring Statement some are to be implemented immediately and some are to be rolled out over the ensuing few years. The headline announcement of increased allowances for childcare will not introduced until 2024, meaning that many of the children this will cover are not yet born, and some of the departmental spending budgets seem to be conflicting with long term governmental aspirations; if 2.5% of GDP is to be spent on defense then all others will need to see substantial cuts by the ed of next parliament.
The Big Numbers
The UK is forecast to have gone through the biggest energy and inflation shock since the 1970s, whilst avoiding a (technical) recession, with unemployment only peaking at just 4.4%. Fortunately avoiding the levels seen in the OPEC Crisis of the mid 1970s; which also saw a peak-to-trough GDP drop of 3.9%. Growth, however, remains sluggish at best. The economy is in a very ‘mixed state’ in 2023; it is possible to find high propensity for growth and catastrophic risk of failure.
Not talking about public sector pay
The Chancellor chose largely to ignore pressures on public services in this Budget. A loud omission given the context of 750,000 people striking that day, across a variety of unions, and the inflationary pressures affecting prices and costs.
A pay deal has been offered to nurses outside of the budget, through the Royal College of Nurses, demonstrates that the government are immovable in the faces of the demands from the other groups of workers going through strikes and that they see pay inflation a core to the broader inflation numbers. The OBR numbers suggest inflation at 2.9% by next financial year; which meets the governments target of halving inflation from its 11% high.
A Plan For Growth?
The Chancellor has declared this a ‘budget for growth’ but the detail falls some way short of clarity on sectoral or spatial support for businesses that are on a strong growth trajectory. There was a commitment to a £28 billion, three year increase in investment allowances. However, the lack of certainty of the past to years that have seen four other major corporate tax changes, is likely to leave some businesses hesitant to capitalise this.
The policy will deliver a temporary 3% boost to investment allowances. To add some context, to catch up to our closest competitors (France, Germany and USA) we would need a 30% boost.
Conventional economic commentary focuses between the narrow tramlines of the aggregate averages. Meanwhile beyond the debate about technical recession a data-enabled view can show trajectories for businesses moving further apart. All this is perfectly clear from firm level micro data, focussing on sectoral or spatial dimensions.
The result of this is more winners, more losers, more risk but also potentially more rewards. It may come to pass that the troubles of Silicon Valley Bank and Credit Suisse matter far more in the medium term than the measures announced on Wednesday. The FTSE saw a 6.6% fall during the Chancellor’s speech.
Macro-economics and national level economic statistics are poor guides to what is really going on within an economy. The UK economy is highly complex and whilst it shows signs of stagnation in the aggregate, it is highly dynamic in the specifics. National averages and aggregate measures conceal wildly differing fortunes for companies depending on the spatial and sectoral specifics of businesses.
R&D intensive SMEs
R&D intensive SMEs have benefited from a £1.8 billion package. Small and medium sized businesses that spend more than 40% of their budget on research and development will receive a £27 credit, from this package, for each £100 spent on R&D.
Subnational economic development
The levers available for economic development, business support and scaling businesses have received mixed news with confirmation that LEPs are due to wind down by 2024. This is at least a form of clarity for the unloved business-led city-regional bodies established by the coalition government in 2010 to shift activity to a more local level than the regional development agencies which they abolished.
The decision to return economic strategy to local government and an absence of mid-level strategic planning or economic development leaves a great deal of England with different and potentially underpowered economic governance. The devolved governments in Northern Ireland, Scotland and Wales and the GLA have more organisational heft and there was a boost for the core cities of Greater Manchester and the West Midlands, whose devolution trajectories have been boosted by single pot funding of a billion to each city. Further, areas who have lost out in the battle for Levelling Up funding have had area-based investment zone status to celebrate.
One of the key talking point in the lead up to the budget was cost of living and inflation leaving household significantly worse off, with some struggling to afford the basics. Unfortunately this will not see much of a change; typical real household disposable incomes are on track to remain lower by the end of the forecast period (2027-28) than they were before the pandemic (2019-20). If the slow growth of the last decade had continued through the pandemic, incomes would be £1,800 higher than currently projected for 2027-28.
Taxes as a share of GDP are expected to hit a 70-year high of 37.7% by 2027-28, a 4.7 percentage point increase since 2019-20, equivalent to nearly £4,200 extra for every household in the UK.
There is some small comfort to households in that the Energy Guarantee Support Package has been extended (for households).
The Chancellor announced the biggest increase in childcare support on record. Under the current system a single parent of a one year old child, that was earning the National Living Wage, that moved from 25 hours of work a week to 35 hours would see their annual income fall by £370 once the costs of childcare were factored in. Under the new system, that same parent would see their annual income rise by £700.
Much of the initial coverage on the Budget has focused on the ways in which pension changes favour the 1%. Raising the annual, and scrapping the lifetime, allowances for tax free pension saving costs around £1.2 billion and are expected to increase employment by 15,000 – a cost of around £80,000 per extra worker.