UK Spring Budget 2023

Background

This was a challenging first Budget for the Chancellor, Jeremy Hunt, with the painful consequences of last September’s mini-budget by his predecessor Kwasi Kwarteng still fresh in memory. The Chancellor today contrasted the job of his 2022 Autumn Statement as being about restoring stability, with the job of this Budget focussing on long-term growth. It came on a day when over 400,000 workers – including teachers and junior doctors – were on strike; a stark reminder of the economic challenges facing the country. Hunt faced a difficult balancing act.

The UK is suffering from sluggish economic growth and declining worker productivity, yet measures to make improvements in these areas will inevitably be constrained by the need to bring high inflation under control and manage the nation’s finances in a prudent manner. All decisions made by the Chancellor will have come with a keen awareness of difficult trade-offs.

Our summary view

During his 2023 Spring Budget speech today, Jeremy Hunt announced that the Office for Budget Responsibility are now forecasting that the UK will narrowly escape a recession this year. This was met with cheers from backbenchers, which reflects quite how low expectations have fallen – economic growth is still expected to decline by 0.2% across 2023, despite technically avoiding a recession (two consecutive quarters of decline). There are reasons to be optimistic, however, not least from the prospect of inflation falling to 2.9% by the close of the year. A return to more moderate levels of inflation – both in the UK and globally – would provide a boost for investors and much needed relief for households.

The Chancellor’s speech was lengthy (including line items such as £200m extra cash for a road pothole fund), at times self-congratulatory (speaking as much about past Conservative successes as the future), and perhaps relied too much on projected data (with lots of detail on outcomes expected five or ten years down-the-line). But, there were several tangible developments that will be of particular and immediate interest to investors. First, was a series of measures designed to lower barriers to business investment, such as full expensing of capital investment against taxable profits(a £9bn per annum boost). Second, amidst a raft of measures designed to lower barriers to work, was the complete abolition of the Lifetime Allowance for pensions and an increase in pension contribution limits. In different ways, both policies are good news for UK investors.

Of more political relevance to the public were announcements around levelling-up funding and devolution of powers to regional authorities, significant improvements to childcare allowances and disability benefits, and some measures to help households with energy bills. Specific improvements to the lives of public sector employees and the property market were notably absent, at a time when both topics will be on the mind of the electorate. Time will tell whether this mix of policies will be significant enough to repair the recent damage to confidence in the Conservative Party, especially amongst the UK’s ‘red wall’ voters.

Policy highlights

Most major policy announcements were split into a few areas: supporting enterprise, employment & education, and making sure that benefits were felt everywhere in the UK.

Enterprise. Policies focussed on removing barriers to investment and making the UK a more productive, attractive, and competitive market.

• A new policy of full capital expensing, to allow certain investments to be fully written off against taxable income, worth £9bn per annum for three years. Replaces the super-deduction system.
• Enhanced or extended tax relief for certain R&D, and for the creative and cultural sectors. – A lighter regulatory touch resulting in faster approvals for new medicines and healthcare.
• Significant long-term funding for artificial intelligence and quantum computing, and an easier regulatory environment for tech companies to innovate in.

Employment & education. Policies focussed on reducing barriers to work, particularly for older citizens and women.

• Abolishment of the Lifetime Allowance Charge for pensions and an increase in the annual allowance from £40k to £60k.
• – By 2025, 30 hours per week of free pre-school childcare for working parents.
• Funding additional after-hours wraparound childcare within schools and from childminders.
• Apprenticeships and support schemes to increase employment of the over-50s.
• Reform to disability benefits to remove disincentives to work whilst retaining benefits.

Everywhere. Policies to reduce geographical disparities, especially London vs elsewhere.

• 12 new regional Investment Zones, with funding worth up to £80m each.
• More devolution of power to local leaders, starting with Greater Manchester and the West Midlands.
• There were also policies to fund regional regeneration projects, fix road potholes, improve leisure facilities, and fund charity and community organisations around the UK.

Some other policies of note were focussed around:

• Reducing the impact of inflation for households, such as by an extension to the 5p cut in fuel duty, more Draught Relief for beer in pubs, an extension of the Energy Price Guarantee to June 2023, and rules to remove unfairness around energy prepayment meters.
• Defence. Increase in defence and national security spending and veteran support.
• Energy. Supporting new nuclear power development and carbon capture technologies.