Introduction
The budget statement, delivered on March 15th by the Chancellor of the Exchequer, had a simple aim: to deliver a positive assessment of the economy with a limited range of funded measures designed to boost growth. Avoiding the kind of showy, last-minute surprises that past Chancellors have delighted in announcing was vital to convey the importance of stability and predictability to voters, businesses and the financial markets. The Budget seeks to make a virtue out of dullness and solidity; it is a recognition that the state of public finances and economic growth is fragile. But it also fits in with a wider attempt by the Prime Minister and his team to show that taking a serious, thoughtful approach to politics and policy can deliver economic benefits to the country.
The Budget statement is designed to demonstrate that the Government has moved on from the political instability of recent years under Boris Johnson and Liz Truss – illustrated neatly by the fact that Jeremy Hunt is the third Chancellor to hold the position since Rishi Sunak delivered the last Budget statement.
The Government has been fortunate that the state of the economy has improved significantly since the Autumn. The Budget Statement contained some encouraging economic news with predictions that a recession would be avoided for the UK economy after all, unemployment will not rise as sharply, public finances are in better shape and inflation will fall to around 3% by the end of this year. That these forecasts came, not from the Treasury, but rather from the independent Office for Budget Responsibility (OBR) shows how important that body has become in shaping what a Chancellor can do. It was the lack of an OBR assessment of Kwasi Kwarteng’s mini Budget in September that caused the tumult in financial markets that then led to the collapse of the Liz Truss premiership.
The political context
This Budget Statement will be the penultimate one to be delivered during this Parliament before a General Election, expected in summer or autumn of 2024. With Labour holding a very substantial lead in the opinion polls, a Budget is one of few other opportunities for the Conservatives to claw back that gap. Some of the measures announced today, especially those around childcare and boosting growth, are designed to attract back voters the Conservatives will need to have any kind of chance at the next election. While many commentators assume that a Keir Starmer Labour premiership is all but guaranteed in 2024, ratings for Rishi Sunak as Prime Minister are far better than for the Conservative Party. Recent announcements on the Windsor Framework, the defence deal with the US and Australia and new legislation to tackle illegal migration have all boosted his standing. Whether that can continue and, importantly, whether that will translate into support for the Conservatives after 13 years in office will be the key determinants of who wins the next General Election.
Cost of living support
The Budget contained a range of targeted measures designed both to help ease the cost- of-living crisis caused by the spike in energy prices following Russia’s invasion of Ukraine, and to boost growth for the future. The energy price guarantee that keeps average family energy bills to £2,500 will be extended for another three months until July. This, and other more targeted support to ameliorate the impact of high energy prices, are the single most costly element of the Budget, confirmed by the Chancellor to be £94bn in total. While this level of expenditure is huge, it is rather less than many forecasters predicted in the Autumn. So the Chancellor did have greater scope to extend the financial support for households for a further short period. How energy prices change in the months, and possibly years, ahead will largely shape the economic prospects for the UK as well as determining how much scope the Chancellor has in next year’s Budget to announce spending increases or tax reductions.
A business friendly UK
“We want the UK to be the best place in Europe for companies to locate, invest, and grow in”
The centrepiece of the Budget were measures to show that the Government had a longer term plan to deliver higher growth. The Chancellor set out four ways he would achieve this:
- “removing obstacles that stop businesses investing”
- “tackling labour shortages that stop them recruiting”
- “breaking down barriers that stop people working”
- “harnessing British ingenuity to make Britain a technology and science superpower”
The measures announced sought to tackle each of these issues in turn with the majority of the Budget focused on specific policy or tax changes that would make Britain a more attractive place for business growth.
This was, at least in part, a response to the Labour Party’s recent major announcement that they had created 5 long term “missions”, which included making Britain the “fastest growing economy in the G7”. (Penta will be preparing a detailed note shortly that will provide a comprehensive analysis of Labour’s current plans, for those interested in understanding what a Labour Government would mean for business.)
Although the Chancellor recommitted to increasing Corporation Tax rates from 19 percent to 25 percent, this rise will only affect 10% of businesses. Since George Osborne cut Corporation Taxes during the 2010-2015 period when he was Chancellor, there has been a growing belief in the Treasury that the cost of this tax reduction was not delivering sufficiently high levels of investment, especially from abroad. Instead, as announced today, more targeted financial incentives for investment have been seen as a more effective policy tool. That is why the Budget Statement contained a number of other changes designed to increase investment levels. These included a major increase in capital allowances for investments, allowing companies to write off 100% of those investments for the next three years at a cost of £9bn a year.
In addition, the Budget introduced changes to encourage investment in energy security and renewables, including for the development of modular nuclear power. The other sector to attract the Chancellor’s attention was life sciences, where tax and regulatory changes were designed to enable faster growth in the sector, together with a less restrictive regime for the approval of medicines and medical technologies. Taken together, these show how the Government is focusing on these two sectors specifically as a way to help the UK become a “science and technology superpower”.
Despite being central to the government’s post-Brexit growth strategy, surprisingly, there was almost nothing on financial services beyond the changes to pension rules. Although not mentioned in the Budget speech itself, changes were announced to make it easier to invest in real estate investment trusts (REITs). There was also confirmation that nuclear energy will be included in the UK’s green taxonomy (albeit subject to consultation). This is aimed at encouraging private investment in nuclear energy but has been particularly controversial in the EU’s taxonomy.
Tackling labour shortages, boosting growth
Post pandemic, there has been a significant rise in the number of economically inactive people in the UK, especially among the over 50s. The Chancellor referenced the 7 million economically inactive adults – a far higher figure than before COVID – and the economic costs this has for individuals and the wider economy. To tackle this, he announced a series of measures to attract more people into the workforce:
- Reforming childcare to enable more parents to work, including the extension of the current 30 hours of funded childcare to any child over 9 months old.
- Changes designed to encourage more disabled people and those on universal benefit into work.
- Pension reforms to attract those over 50 who have stopped working (including, critically, senior NHS staff) to return to work, including changes to tax-free pension allowances, abolishing the lifetime allowance and increasing the amount that people can contribute to a pension after previously drawing one.
The Budget was a highly focused bid to demonstrate the Government’s economic credentials and show that they had a plan to get the economy growing again and removing constraints to economic success. The poor state of public finances meant the Chancellor had limited means to increase expenditure, or cut taxes, but it was a positive statement of intent to turn around the economy as fast as possible. Achieving that goal will be the minimum requirement for a Conservative Prime Minister to have any chance of staying in office beyond 2024.
To read the Budget statement, you can see the full document here Spring Statement 2022 – GOV.UK and the range of detailed associated announcements and consultations can be found Policy papers and consultations – GOV.UK (www.gov.uk)
If you would like to discuss any aspect of the Budget statement, please contact our expert Penta team who can advise you on how it might affect your organisation.