UK Budget: Chancellor’s attempts to lift medium-term growth are unlikely to succeed
Despite a raft of measures to boost growth, and positive short-term news from the OBR, we think the outlook for the UK remains challenging.
The UK is one of the worst-performing advanced economies since the start of the pandemic, and according to the IMF, will be one of the worst performing this year. Against this backdrop, it’s understandable that chancellor Jeremy Hunt decided to focus on boosting growth as his priority for his first full fiscal statement.
Recession avoided for now?
The good news for the public finances is that the independent Office for Budgetary Responsibility (OBR) now has the UK avoiding a technical recession this year (two consecutive quarters of negative growth). The economy still declines by 0.2%, but this is substantially better than the -1.4% previously forecast. GDP growth for 2024 has also been upgraded, from 1.3% to 1.8%, but the medium-term prospects have been downgraded significantly.
Growth by 2027 is assumed to be just 1.9%, compared to the previous forecast of 2.3%. This follows the recent downgrade to medium-term prospects by the Bank of England, which cited lower productivity growth as a cause for reduced growth.
Inflation to fall
The OBR forecasts inflation to fall back slightly faster than back in November. CPI is forecast to fall from 9.1% in 2022 to 6.1% in 2023 (previously 7.3%), before falling to below 1% for the proceeding three years. This helps boost the real disposable income of households, and therefore growth in the forecast.
New policy measures
Turning to the chancellor’s new policy measures, the extension of the current £2,500 ‘Energy Price Guarantee’ for a duel tariff typical household for an extra three months is likely to have the biggest impact in the near-term. The cap was due to rise £3,000 in April, but will now remain in place until the end of June. However, it is worth remembering that a £400 discount which effectively reduced the cap to £2,100 has come to an end in recent months, and so households are still experiencing effective increases so far this year. From July, the Ofgem set cap should be lower than the current government cap thanks to falling wholesale gas prices in Europe, and so households should start to see a reduction in home energy bills.
Further help with the ‘cost of living crisis’ included the freezing of fuel duties for another year, although they are rising on most alcohol drinks and tobacco.
The chancellor’s focus on boosting medium-term growth mostly targeted companies and enterprise, although there was also some consideration for the staffing shortage companies face.
The “levelling up” agenda was back, with money being promised to enterprise zones where applicants are successful. Hardly new or novel, yet the government keeps returning to this strategy.
In an effort to boost investment, the exchequer will now offer a full capital allowance for all businesses for their capital expenditure. This means that for every £1 spent on IT or infrastructure, £1 is deducted from taxable profits. The chancellor has been under pressure to offer something in this area, partly as business investment growth in the UK has been woeful since Brexit, but also because the previously announced Super Deduction (worth £1.30 for each £1 spent) has come to an end. This is less generous than the outgoing initiative, and so it is difficult to see why will it be any more successful. Indeed, the OBR assumes that the policy will only boost businesses investment initially, before it falls back in subsequent years.
Green initiatives were to be expected, and the added investment in carbon capture and fusion technology will be welcomed. However, the decision to adopt nuclear energy as a major new source for future energy generation will be highly controversial. The government now aims to have 25% of the UK’s domestically-generated energy to come from nuclear power.
Attempts to boost labour supply
Policies designed to boost the supply of labour are likely to receive mixed reviews. Separating work and disability benefits makes sense as it will encourage those that can work to do so without fear of losing disability allowances. Boosting occupational health aid and spending will also be welcomed, as it helps stop workers leaving employment to receive help coping with health issues. Taking tougher action on those that are unemployed or underemployed but receiving benefits will be challenged.
For those over the age of 50, more guidance for career options and “returnships” (a form of new internships) will be created to help those workers find a way into new employment.
Additionally, the chancellor has finally made the right decision and not only raised the annual pension allowance to £60,000 per annum, but also abolished the life-time allowance. This had become a serious problem for high-paid staff, especially in the NHS, that were approaching those limits and were choosing to cut back work hours.
Expensive childcare, especially for children under 4-years old, causes many parents to pause or even give up on careers to care for their children. The chancellor has announced funding for childcare providers and greater incentives to workers to enter the profession. The biggest change, however, was the lowering of the 30-hours per week of free childcare to those over 9-months old (previously available for 3-4 year olds). This should be welcomed but is less generous than it appears. First, the 30-hours per week only applies to school terms (39 of the 52), and is halved to 15-hours for parents who earn over a certain threshold. Moreover, the policy will not begin for several years, due to the lack of capacity in the childcare system.
Finally, the last major announcement was the extra money promised to the defence budget, which as a share of GDP, will rise from the current 2% to 2.5% over the coming years.
Overall, the chancellor prioritised near-term help for households that are facing high energy bills, but also made an attempt at boosting medium-term growth prospects. With the OBR’s forecast moving in a more favourable direction, about half of the “savings” have been spent, while the rest put aside to lower borrowing. Clearly, the chancellor has one eye on the next Budget, which should be the final one before the next general election.
So what was missing from the Budget? There was almost no mention of the NHS, which is odd given that the official data shows that NHS waiting lists has recently broken through 7 million and continue to rise. Surely this is one area that should have been a priority as long-term sickness is the most popular reason stated for those that are inactive from the labour force.
The obvious answer to staff shortages is to accept the need for more migrants, but the government’s aversion towards migrants remains a challenge for the economy.
Although education was mentioned in the speech, it only featured in the policies around wrap-around care, and nothing about raising education standards. Something that won’t be lost on the teachers that are on strike today. There was also no mention of pay deals for public sector works, also many others striking today, which is bound to anger trade unions further.
It is worth remembering that tax as a share of GDP is close to record highs, and at the end of this financial year, corporation taxes will rise sharply, and the freeze on personal tax allowances will also increase the burden on households significantly.
While the OBR may be confident that a recession has been averted, we disagree, and think that the outlook for the UK economy remains very challenged.
The view from our UK equity team:
Jean Roche, Fund Manager:
“The most significant measure affecting business today, which was not already known, was the replacement for the capital allowance “super deduction” scheme, which was due to end on 31 March2023.
The chancellor’s announcement today, that “every single pound a company invests in IT equipment, plant or machinery can be deducted in full and immediately from taxable profits”, involves a non-trivial £9 billion cut in corporation tax, per annum, for three years.
This should help to offset the previously-announced corporation tax rate rise from 19% to 25%, which affects the vast majority of the UK-quoted universe with operations in the UK.
On a more sector specific basis, Life Sciences companies are to benefit from a more generous research and development (R&D) tax regime.”