This was not the day for a populist budget – that will wait until next year, with all the usual pre-election tax cuts and baubles. Despite having a little more fiscal firepower because of the improved public finances, the Chancellor chose to keep most of his gunpowder dry.
The purpose of this week, certainly from a political perspective, was to demonstrate ‘grip’ and momentum.
Six months ago, the Government had neither—everything they said and did was unpicked and chaotic. The opposition and media controlled the narrative, and the Government’s prospects were dire.
But with spring comes early signs of a new narrative blossoming for Sunak. OK, that might be overdoing a bit. Still, the Prime Minister is certainly on a bit of a roll, which even the opposition leader and chairman of the Treasury Select Committee, in their early responses, acknowledged, albeit attributing it more to luck than judgement.
Two weeks ago, he got a deal with the EU on the thorny Northern Ireland issue that eluded May, Johnson and Truss.
At the weekend, his Government prevented the Silicon Valley Bank from going under and sinking a large section of the nascent tech sector, which most commentators think his predecessors wouldn’t have handled as competently.
There are more than 40 Government Bills in Parliament, many of which have been unpaused and reeled in from the long grass where previous PMs had kicked them.
Sunak asked his Chancellor for a Budget that maintains this momentum: dull but competent, with no room for serious Labour attack, a steady hand on the tiller.
The Budget was framed on Rishi Sunak’s key priorities, which were set out in January: halving inflation, reducing the national debt and increasing growth. Hunt then used the alliteration from his Bloomberg speech with segments on the ‘four Es’ of ‘enterprise, education, employment, and everywhere.’
The fiscal headline is that the UK will avoid a recession and that inflation will fall to 2.9% by the end of this year, with growth picking up from 1.8% next year to 2.5% in 2025.
The eye-catching parts of the Budget included an increase in the pensions annual tax-free allowance from £40,000 to £60,000 and abolishing the Lifetime Allowance entirely – previously set at £1.07m.
The Chancellor entered a new word into the Westminster lexicon – ‘Returnerships’ – a new apprenticeship targeted at the over-50s, including career advice for those on Universal Credit.
For parents with children under the age of three in working households, there will be 30 hours of free childcare for every single child over nine months, which should reduce childcare costs by 60% when it is phased in over the next couple of years.
Despite heavy pressure from business groups, Hunt decided to keep the rate of corporation tax as is at 25%. However, he introduced a more generous regime for pre-profit, fully expendable deductions with an amended continuation of the super deduction scheme, which in most cases should have the same net effect but ensure that firms keep investing.
He maintained the energy price guarantee £2,500 cap for the next three months. The planned increase of 11p in fuel duty this year will be cancelled, and rates will be kept the same for the next 12 months. This is expected to save the average driver £100.
He pledged £5 billion in funding for defence, increasing to £11 billion over the next five years – a NATO commitment busting 2.5% of GDP ‘when circumstances allow’, making a firm statement to our would-be foes.
Further details are covered below, and the team have been trawling the small print of the accompanying Budget documents.
Lies, Damned Lies, and Statistics.
Just ahead of the Budget, Ipsos Mori had a poll showing Labour 10% ahead on the economy. This is a rare and important milestone for Keir Starmer’s party. Even throughout the political tumult of the last couple of years, the Tories have generally been ahead on this issue, and have taken comfort from the strong link between perceived economic outlook and voting intention.
But the same poll also scored Starmer’s net approval rating at minus 12%. A number worth dwelling on for a moment. It’s almost the same as Neil Kinnock’s score this far out from an election.
Whatever way you cut it, nothing is certain about the next election. The Chancellor’s job was to keep the momentum going and demonstrate a serious, grown-up grip on the public finances.
The jury will return a quick verdict on the airwaves, the financial markets and in the pubs and WhatsApp groups over the next 48 hours, but the Chancellor will return to his office at the Treasury quietly confident that he’s had a good day.
- While growth is set to contract in 2023 by 0.2%, the UK is ‘set to avoid a technical recession’ with growth set to return in 2024 (with growth of 1.8 per cent).
- The economy is then set to grow for every year of the forecast (with growth of 2.5 per cent in 2025 and 2.1 per cent in 2026)
- The OBR is forecasting that inflation will fall to 2.9 per cent by the end of 2023 – a more rapid decline than previously expected from its peak of 11.1 per cent in October 2022.
- Underlying debt is forecast to be 92.4% of GDP next year, 93.7% in 2024-25; 94.6% in 2025-26, and 94.8% in 2026-27, before falling to 94.6% in 2027-28.
- Despite the improved picture from November’s Autumn statement, the OBR has claimed ‘the economy still faces significant structural challenges’.
- The OBR has forecast that real living standards will fall by a cumulative 5.7 per cent in 2022/23 and 2023/24 – this would mark the largest fall in living standards since records began.
Energy bills and cost-of-living support
- Energy price guarantee – The Government confirmed that the Energy Price Guarantee capping typical annual energy bills at £2,500 will remain until June, saving households an estimated £160 between April – June
- Prepayment meters – The energy premium paid by households on pre-paid energy meters is ending as the Government will bring charges of 4 million households on energy prepayment meters in line with other customers
Business and taxation
- Corporation tax increase – The main rate of corporation tax, paid by businesses on taxable profits over £250,000, confirmed to increase from 19% to 25%
- Capital expenditure expensing – The expired super deduction policy, designed to incentive business investment, has been replaced with a new scheme, allowing businesses to expense their capital expenditure for (at least) the next three years – this is a reported £9 billion a year tax cut
- Pension allowance increase – The annual allowance for pensions input is to be increased from £40,000 to £60,000 from April 2023. This is intended to incentivise people to stay in work longer
- Lifetime allowance abolished – The government will remove the Lifetime Allowance charge on pensions from 6 April 2023, before fully abolishing the Lifetime Allowance in a future Finance Bill, meaning there will be no penalty limit on what people can save before they stop working. Like other measures, this will incentivise doctors and other professionals to remain in work for longer
Devolution and levelling up
- New investment zones – 12 new low-tax zones to be established across England to support GDP growth and reduce regional inequalities
- Local transport – It was confirmed that there will be a second round of the City Region Sustainable Transport Settlements, allocating £8.8bn over the next five-year
- Regeneration projects – A further £161 million was announced for regeneration projects in Mayoral Combined Authorities and the Greater London Authority
- Levelling Up Partnerships – The Government announced £400 million was to be made available for new Levelling Up Partnerships, with the aim of regenerating 20 areas across England
- Great British Nuclear – Jeremy Hunt announced the launch of “Great British Nuclear”, aimed at bringing down the costs of producing nuclear power. Great British Nuclear (GBN) will aim to address constraints in the nuclear market and support new nuclear builds as the UK works towards its Net Zero goals
- Sustainable nuclear – It was announced that nuclear power will now be reclassed as ‘environmentally sustainable’ which will give it access to the same investment incentives as renewable energy
- Defence spending boost – Over the next two years, an additional £5 billion spent on defence and national security – with £2 billion spent each year following for the remainder of the forecast period
- Free childcare to increase – for parents with children under the age of three in working households there will be 30 hours of free childcare for every single child over nine months to reduce childcare costs by 60%, which will be phased in over the next couple of years.