A Budget for ‘Growth’ or for ‘Stability’

Today’s UK budget is called ‘the budget for growth’ with the four E’s of enterprise, education, employment, and everywhere. 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 were known by 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 Budget.

It contained many small measures underpinned by a much better economic outlook produced by the Office for Budget Responsibility (OBR). The gains from a better fiscal position are retained over the forecast period, leaving the potential for up to £30 billion or so of cuts ahead of the next general election.

Chart 1: UK economic growth revised up this year and next
Chart 1: UK economic growth revised up this year and next








The big picture

The biggest economic news was that the OBR’s economic assumptions had changed significantly from a contraction of 1.4% expected in November to just 0.2%, and next year’s growth forecast raised to 1.8%. That’s 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 on a lower trend than in November 2022.

The OBR forecasts that consumer price inflation will fall to 2.9% by the end of 2023 from 10.7% at the end of 2022. That has implications for interest rates that look as if they are close to a peak, if not there already. It means the Bank of England may have to revise its economic forecasts, which are markedly more pessimistic than the OBR’s.

Chart 2: UK CPI inflation to rise more slowly
Chart 2: UK CPI inflation to rise more slowly








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. Therefore, the Budget has not mitigated the cost-of-living squeeze, 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 also help support equity markets.

For the pound, it’s mixed news regarding any Budget impact. On the one hand, lower interest rates may make it less attractive. Still, on the other hand, 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.

Chart 3: So the OBR thinks bank rate will peak near 4%
Chart 3: So the OBR thinks bank rate will peak near 4%









The notable measures were:

  • Pension annual tax allowance increased from £40,000 to £60,000, and the abolition of lifetime allowance, previously £1.1m.
  • There were announcements to bring more retired and inactive people into the workforce through changes to disability allowance rules, new types of apprenticeships targeted at the over the 50s, 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 went ahead to 25%, 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’ by then Chancellor Sunak has been replaced by full ‘capital expensing’ – meaning the total cost of investment can be taken off gross profits – for the next three years, expected to cost about £9bn a year or £27bn over three years. Then it is dropped, as it would have meant the Chancellor would not have met his fiscal rule. If this happened, it would mean massive disruption for large firms.
  • Nothing was done about business rates or the high overall tax burden on SME firms.
  • There was a lot of focus on the energy sector. As expected, the price gap cap will remain at £2500 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, which means that they’ll 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 wind and solar panels. That will make achieving the UK’s net zero carbon emissions target by 2050 easier.

As expected, the follow-through of investment zones, twelve in the UK, was accompanied by relatively small amounts of money from a macro, though not micro, perspective being dispersed to local regeneration projects and some new announcements about levelling up partnerships.

Defence spending is expected to be 2.25% of GDP in the next three years, with an additional £11bn, according to the Chancellor, over the next three compared with previous plans.


Chart 4: tax and debt to remain high as a share of UK GDP - UK taxes as a share of GDP
Chart 4: tax and debt to remain high as a share of UK GDP – UK taxes as a share of GDP







Chart 5: UK public sector debt as a share of GDP
Chart 5: UK public sector debt as a share of GDP








The big picture is that the better 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 this is going to bring will play out in reducing the fiscal deficit over the coming five years.

But the economy will be only 0.6% bigger in this forecast than in the November 2022 Budget. UK economic growth remains sluggish, with the post-pandemic rate anaemic compared with the trend of 2.75% before the global financial crisis in 2008/9.

There will be a relatively tight fiscal ship, with net spending rising by only 1% a year in real terms from 2024/25. The tax burden will remain high as a lack of indexing in line with inflation means more people will be dragged into higher tax brackets. The Budget said nothing about funding the NHS or care homes nor the impact of current strikes in the public sector.

The Chancellor has opted for stability and, if successful, leaves the prospect of some potential tax giveaways ahead of an election in 2024.