U.K. Finance Minister Jeremy Hunt delivered the government’s Spring Budget on Wednesday.
In a wide-ranging speech, Hunt said that the independent Office for Budget Responsibility had now forecast that the U.K. economy would not enter a technical recession in 2023, as was previously anticipated.
Inflation is now predicted to fall from 10.7% in the final quarter of 2022 to just 2.9% by the end of 2023.
Hunt announced a slew of tax and spending pledges for the next five years, affecting the labor market, pensions, childcare, defense and business investment, as the government seeks to address the country’s sluggish economic growth prospects.
The Federation of Small Businesses said that a lack of targeted support for smaller companies in Wednesday’s budget had left many feeling “overlooked and undervalued.”
“The Chancellor has set high expectations for supporting small firms during these challenging times, but today’s Budget will leave many feeling short-changed. The distinct lack of new support in core areas proves that small firms are overlooked and undervalued,” Martin McTague, national chair of the FSB, said.
“On business taxes, it spends £27 billion extra on big businesses, arguing that small businesses are already catered for. This will leave to a feeling of being left behind,” he added.
The U.K.’s Institute for Fiscal Studies, an independent research body, said that Wednesday’s announcement looked like a “sensible set of changes” that could have a “marginal, but positive, impact” on the British economy.
The expanded childcare allowance could help “tens, but not hundreds, of thousands of parents into work — provided that it is appropriately funded,” IFS director Paul Johnson said.
However, Johnson noted that the budget was equally as notable for what it left out, particularly regarding its failure to address widespread industrial action in the country.
“There was no funding to be found to improve the pay offer to striking public sector workers, where £6 billion might have been enough to make an inflation-matching pay offer possible this coming year. That’s a political choice. Money for motorists, but not for nurses, doctors and teachers,” he said.
Sterling traded lower following Hunt’s budget announcements, falling around 1% to trade at $1.2031. Meantime, the British pound traded up around 1% against the euro at 0.8826.
The FTSE 100 also fell more than 3% amid a wider fall in European stock markets, with banking stocks leading losses following the fallout from global Silicon Valley Bank and more bad news for Credit Suisse.
In his retort in the House of Commons, main opposition Labour Party leader Keir Starmer blasted Hunt’s Budget as “a Budget for growth that downgrades the growth forecast.”
He accused the chancellor of “sticking plaster” politics and said the government’s cupboard is “as bare as the salad aisle in the supermarket,” with the economy having spent “13 years stuck in a doom loop” under Conservative governments.
“The only permanent tax cut in the budget is for the richest 1%. How could that possibly be a priority?” he asked lawmakers.
The OBR said in its report on Wednesday that the economic and fiscal outlook had “brightened somewhat” since the previous forecast in November.
“The near-term economic downturn is set to be shorter and shallower; medium-term output to be higher; and the budget deficit and public debt to be lower. But this reverses only part of the costs of the energy crisis, which are being felt on top of larger costs from the pandemic. And persistent supply-side challenges continue to weigh on future growth prospects,” the OBR said in its executive summary.
“Against this backdrop, the Chancellor has spent two-thirds of the improvement in the fiscal outlook on his Budget measures, providing more support with energy bills and business investment in the near term, while boosting labour supply in the medium term. This lowers inflation this year and, more significantly, sustainably raises employment and output in the medium term. But it leaves debt falling by only the narrowest of margins in five years’ time.”
Hunt confirmed an additional 30 hours of free weekly childcare for children under the age of three. This will eventually cover all children from the age of nine months within school semester time and will apply in households where both parents are working.
Schools and local authorities will receive additional funding to support wraparound care between 8 a.m. and 6 p.m.
Parents claiming Universal Credit will receive monthly support of up to £951 for one child and £1,630 for two children, paid upfront.
The government is publishing a white paper on changes to disability benefits. This will include a potential abolition of work capability assessments and the separation of benefits entitlement from a person’s ability to work.
Disabled benefit claimants will therefore be able to seek employment without running the risk of losing financial support. A new voluntary employment scheme will aim to spend up to £4,000 per person to assist disabled people in finding appropriate jobs.
Hunt also said the government will offer “Returnerships” for people over the age of 50 who wish to return to work, alongside skills boot camps and sector-focused work academies.
Universal Credit claimants will receive more rigorous sanctions for failing to demonstrate suitable efforts to find employment, while the threshold to claim for people working low hours will increase from 15 hours to 18 hours at the National Living Wage.
Hunt announces that the annual tax-free allowance on pension savings will rise from £40,000 to £ 60,000, while the Lifetime Allowance, previously set at £1.07 million, will be abolished.
Hunt announces plans to class nuclear power as “environmentally sustainable,” providing access for nuclear producers to the same investment incentives as renewables.
Up to £20 billion will be allocated for early development of carbon capture and storage.
Small and medium-sized firms that allocate 40% of expenditure to research and development will qualify for a new tax credit, while new tax reliefs are announced for film, TV and video gaming will be extended.
Setting out the government’s hopes for the U.K. to have the most pro-business tax regime in the world, Hunt announces a new investment allowance worth £9 billion per year, whereby every pound invested in IT, plant or machinery equipment can be deducted from profits.
The OBR forecasts that this will boost business investment by 3% per year.
Hunt announces an £11 billion increase to defense spending over the next five years, with another £30 million allocated to support veterans.
Hunt reveals the OBR is now forecasting that GDP will contract by just 0.2% in 2023, before growing by 1.8% in 2024. 2.5% in 2025, 2.1% in 2026 and 1.9% in 2027.
Unemployment is set to rise to 4.4%, with 170,000 fewer unemployed than initially forecast in the autumn.
Hunt announces that 12 new investment zones modelled on the regeneration of London’s Canary Wharf. The new zones will be in the West Midlands, Greater Manchester, the North East, West Yorkshire, South Yorkshire, the East Midlands, Teesside and Liverpool, along with at least one in Scotland, Wales and Northern Ireland.
“Because of the decisions I take today and the improved outlook for public finances, underlying debt in five years’ time is now forecast to be nearly 3 percentage points of GDP lower than it was in the Autumn,” Hunt says.
In the Autumn Statement, Hunt set a target for public sector net borrowing to fall below 3% of GDP by 2027-28.
The OBR forecasts public borrowing to fall each year from 5.1% of GDP in 2023-24 to 1.7% in 2027-28.
Hunt says underlying government debt is forecast to be 92.4% of GDP next year, then 97.3%, then 94.6%, 94.8%, before falling to 94.6% in 27-28.
The government’s 5p cut to fuel duty will be maintained and fuel duty will be frozen for the next 12 months, Hunt announces, saving the average driver £100 next year.
“Our Energy Price Guarantee, fuel duty and duty on a pint all frozen in today’s Budget. That doesn’t just help families, it helps the economy too because their combined impact reduces CPI inflation by nearly 0.75% this year, lowering inflation when it is particularly high,” Hunt says.
Hunt announces a £63 million fund to keep public leisure centers and swimming pools afloat.
He also commits £100 million to “support thousands of local charities and community organizations.”
A further £10 million will be spent over the next two years to help the voluntary sector “play an even bigger role” in suicide prevention.
Hunt confirms the pre-announced extension of the Energy Price Guarantee at £2,500 to the end of June.
Households on pre-payment meters, often among the U.K.’s poorest, will see their bills brought in-line with “comparable direct debit charges.”
The OBR forecasts that inflation is projected to fall from 10.7% annually in the final quarter of 2022 to 2.9% by the end of 2023.
Chancellor of the Exchequer Jeremy Hunt is up and says the British economy is “proving the doubters wrong” as gilt rates, mortgage rates and inflation come down.
The Office for Budget Responsibility (OBR) now forecasts that the U.K. will avoid a technical recession in 2023.
Glassdoor’s U.K. Economist Lauren Thomas believes the country sorely needs a “back-to-work” budget aimed at tackling heightened economic inactivity, with a tight labor supply restricting economic growth.
“Severe labour shortages in the U.K. are a long-term problem that need immediate solutions. Still, the Chancellor has his work cut out for him with issues such as the UK’s ageing population driving retirement figures beyond his control,” Thomas said.
“Childcare for working parents and training for early retirees are a good start, but what impact this will have remains to be seen.”
Thomas added that hiring will remain difficult for British businesses throughout 2023, and said those seeking employment will need more support in order to tackle the staffing crisis.
– Elliot Smith
Several British media outlets reported Tuesday that Hunt is planning an increase to the amount workers will be allowed to accumulate in their pension savings before entering a higher tax threshold.
The move is reportedly aimed at encouraging people to work for longer as part of a broad set of plans to rebuild the U.K.’s depleted workforce and boost growth.
The BBC reported that other measures expected include upfront childcare payments to parents on Universal Credit (a monthly support payment to low-income or unemployed households), along with additional fitness-to-work tests for people off work for health reasons.
— Elliot Smith
The Guardian reported Tuesday night that Hunt is expected to announce a £4 billion expansion of free childcare that will provide an extra 30 hours a week of care to parents of one- and two-year-olds, while adding £288 million in funding for the existing program of free care for three-year-olds by 2024-25.
British parents face the highest childcare costs in the world, according to the OECD, making it a crucial battleground ahead of next year’s general election.
– Elliot Smith
Laura Suter, head of personal finance at British investment platform AJ Bell, said the extension of the Energy Price guarantee would be a “big relief” for many households staring down the barrel of another huge jump in energy costs from April.
“It’s a no brainer for Chancellor Jeremy Hunt to extend the Energy Price Guarantee, as the previous plan to make it less generous at the same time as stopping the monthly rebate we’ve all been getting off our bills would have landed the average household with an extra £900 on their annual fuel bills in one swipe,” Suter said in an email Wednesday.
“A key part of the announcement is also that those on pre-payment meters will no longer have to pay higher rates for their energy. The topsy-turvy policy means that currently the poorest and most vulnerable households pay higher costs for their energy than the wealthiest in society. Why it’s taken the government until the tail end of the cost-of-living crisis to fix this anomaly will baffle many.”
– Elliot Smith
The government announced on Wednesday morning that its energy bill support program, which seeks to cap energy bills for the average household at £2,500 per year, will run for another three months.
The Treasury said energy prices were 50% lower than forecast in October, but remain high. The government hopes the extension will “bridge the gap” to a reduction in prices expected from the end of June.
“High energy bills are one of the biggest worries for families, which is why we’re maintaining the Energy Price Guarantee at its current level,” Hunt said in a statement.
“With energy bills set to fall from July onwards, this temporary change will bridge the gap and ease the pressure on families, while also helping to lower inflation too.”
The total cost of extending the Energy Price Guarantee at its current level will be £4 billion, the Treasury said. The EPG cap will rise from £2,500 to £3,000 from July until the end of March 2024.
– Elliot Smith
With the cost-of-living crisis still very much in full swing and public sector wages failing to keep pace with inflation, strikes have become a regular fixture in the U.K. during a “winter of discontent.”
As Hunt takes to the dispatch box in the House of Commons on Wednesday, thousands of teachers, junior doctors, civil servants and rail workers will be forming picket lines and protests.
Members of the National Education Union (NEU) begin a two-day strike in England on Wednesday, affecting schools and colleges.
Junior doctors who are members of the British Medical Association and the Hospital Consultants and Specialists Association are walking out over pay and conditions. This follows industrial action by nurses throughout the winter.
Up to 150,000 civil servants across more than 100 government agencies and departments, members of the Prospect and Public and Commercial Services unions, will walk out Wednesday amid disputes with the government over wages, pensions, redundancy terms and job security.
London’s underground system will be severely disrupted on Wednesday as members of the RMT and ASLEF unions strike over job cuts, conditions and pensions.
– Elliot Smith
The U.K. economy flatlined in the final quarter of 2022 to narrowly avoid entering a technical recession, though suffered a sharp slump in December.
The latest data showed the economy grew by an annual 0.3% in January, exceeding expectations.
Alongside Hunt’s Autumn statement, the independent Office for Budget Responsibility predicted that British households would experience their sharpest fall in living standards on record amid persistently high food and energy costs and tightening financial conditions.
The OBR also projected a five-quarter recession that would see GDP contract by 1.4% in 2023.
Deutsche Bank suggested in a note last week that this will likely be revised up to just a 0.5% contraction, in line with the Bank of England’s forecast for a shallower downturn.
The U.K. annual consumer price index (CPI) inflation rate dropped to 10.1% in January from 10.5% in December, having consistently fallen since hitting a 41-year high of 11.1% in October 2022.
The Bank of England in February hiked its main interest rate by 50 basis points to 4%, but the future pace of monetary policy tightening remains unclear as policymakers try to wrestle inflation down toward the Bank’s 2% target.
The Monetary Policy Committee will be assessing Tuesday’s tight labor market data and next Wednesday’s CPI print ahead of its rate decision on March 22.
– Elliot Smith
BNP Paribas Chief European Economist Paul Hollingsworth noted that the Conservative government’s fiscal credibility was “easily lost, hard to regain,” after 2022 became a rollercoaster for economic policy under four finance ministers in just 12 months.
Hunt set a target of putting the public sector debt-to-GDP ratio on a downward trajectory and getting public sector net borrowing down below 3% by 2027/28.
However, Prime Minister Rishi Sunak’s Conservative Party currently trails the main opposition Labour party by more than 20 points in most national opinion polling, with the next general election slated for 2024.
“The improved macroeconomic backdrop and better-than-expected performance in public finances have presented UK Chancellor Jeremy Hunt with a GBP25-30bn windfall,” Hollingsworth said.
“Our central case is that he will only give away around half of this, and bank the rest for some likely re-election giveaways.”