Four “Es” but not much ecstasy: reviewing the Spring Budget
Credit: Simon Walker HM Treasury
With the announcement of the Chancellor’s Spring Budget today, Rolf Merchant analyses the policies - and the politics.
In November, Jeremy Hunt delivered a sobering budget speech as Britain careered towards a difficult winter. It was an emergency repair job completed a mere six weeks into his tenure as chancellor. Four months on, there is some mild improvement in the economic picture but it is too much to say the UK has turned a corner. Nevertheless, there was just enough fiscal breathing space for Mr Hunt to turn the spending taps on, although it hardly produced a torrent.
Tax breaks and big-ticket items were not on the cards. As widely predicted, this budget saw mostly technical tinkering with only one real headline change. This fits with the government’s approach so far this year: stick to doing what’s realistic and achievable ahead of a general election next year. In his response, Sir Kir Starmer, Leader of the Opposition, asked if the British people will feel better off as a result of 13 years of Conservative rule. That is likely to be the key question in the minds of voters as they go to the polls in 2024, and one Mr Hunt has had to start seriously addressing.
Act two budget
Mr Hunt referred to his November statement as a “stability budget”, and in many ways this new budget was act two. The outlook for growth and inflation had improved, but the immediate economic context isn’t much better than it was at the end of 2022. Yes, the economy will avoid a technical recession, but it is not predicted to grow this year. The Prime Minister has made economic growth a top five priority, so he and the Chancellor will hope forecasts from the Office for Budget Responsibility are pessimistic.
There was better news on inflation reduction – another key plank of Sunak’s 2023 plan – which is expected to drop to just under 3% by the end of the year. But for now, inflation is high, and the cost of living is growing. Mr Hunt focused on further support for families and communities, by continuing the Energy Price Guarantee, tackling the rip-off prices from pre-payment meters, freezing fuel duty, and giving £100m of funding to charitable organisations.
Following the release of the Integrated Review earlier this week, Mr Hunt gave a short word on the defence budget. He confirmed that a total of £11 billion will be spent on defence budget over the next five years, and it will be nearly 2.25% of GDP by 2025.
There seems to be some sort of iron law that all budget speeches must include a list of great things about the British economy and all the areas in which the UK is leading. It begged the question of why this potential is not translating into broad-based, sustainable growth. If the declinists Mr Hunt spoke of are to be proved wrong, the many advantages Britain enjoys as a commercial centre must be realised.
This was what the Chancellor sought to address in the meat of his speech, framing his policy approach with four “Es”.
Everywhere
Mr Hunt reiterated that growth must be seen right across the UK, not just in London and the Southeast. Really this section was all about Levelling Up, the much-maligned but still functioning mission of this government.
The Chancellor promised 12 new investment zones, based on a similar model to the London Docklands which ultimately produced today’s Canary Wharf, in all four corners of the UK. Regional transport and infrastructure will get billions more, while, more parochially, £500m more will be available to fix potholes, an evergreen favourite of backbench MPs.
He added there will be moves to give local authorities and elected mayors more powers and more control over the money raised from business rates in their area. The West Midlands and Greater Manchester, widely regarded to be the most successful examples of devolution, will benefit first.
Enterprise
The Conservative Party’s rhetoric on business has always stressed making Britain the most pro-enterprise state in Europe, with low taxes and support for growth industries. (Boris Johnson’s infamous ‘f*** business’ comments aside).
Rhetoric is struggling to meet reality in certain areas. Corporation tax will be going up to 25%, although Mr Hunt did offer a sweetener with full capital expensing on investment in IT and plant and machinery. On R&D tax credits, the subject of ferocious lobbying from the tech sector in the last weeks, the Chancellor does seem to have given the very R&D-intensive companies a better deal, but it will be worse for most companies.
Mr Hunt promised a number of reforms to help the innovation economy, including long called-for changes to allow pension funds to invest in high-growth sectors and to make the London Stock Exchange a more attractive destination for listing. He announced more specific measures to back British medtech and AI, two highly strategic industries for the UK.
For the energy sector, still at the top of the agenda as Putin’s war in Ukraine rages on, Mr Hunt reiterated the government’s commitment to nuclear as a key plank of the net zero transition and more formal backing for potentially game-changing small modular reactors. He announced a chunky £20bn of support for carbon capture usage and storage, which the UK must take advantage of to reach net zero by 2050.
Employment
Mr Hunt was initially a Remain campaigner, but he invoked Brexit in his opening salvo on employment by saying “in that historic vote, our country decided to move from a model based on unlimited low skill migration to one based on high wages and high skills.”
The real issue Mr Hunt focused on was economic inactivity – removing barriers in front of those who want to work but whose personal circumstances make it very tricky. New reforms to disability benefits and increased mental health support are designed to boost employment numbers. The chancellor promised tougher sanctions for those on job seekers’ allowance who do not take up reasonable offers of work.
A well-trailed set of budget announcements concerned over-50s, many of whom have dropped out of the workforce before retirement age in recent years. The Chancellor announced the expansion of the Department for Work and Pensions’ “Midlife MOT” programme, and a new type of apprenticeship scheme for older workers who want to retrain.
The most eye-catching announcement was the total abolition of the pension lifetime allowance. The argument is that too many well-paid professionals (such as doctors) find the existing allowance another disincentive to continue working. It amounts to a tax cut for the wealthier, but Mr Hunt hopes it will be a nudge to keep skilled, experience people contributing to the workforce. Many expected a higher allowance, so abolition was a genuine “rabbit out of the hat”.
Education
Lastly, Mr Hunt turned to reform of the childcare system with a raft of new measures. It amounted to the most radical. Again, this was well-trailed ahead of the statement. Here, the chancellor focused on women who have dropped out of work to look after children but faced too many financial barriers to returning. For too many women said Mr Hunt, “a career break can become a career end”.
The main headline was that free childcare will be expanded to encompass children over 9 months. At present, it is only parents of three- and four-year-olds who receive free care for their children. According to Mr Hunt, this extension is worth on average £6,500 every year for a family with a two-year-old child using 35 hours of childcare every week.
The chancellor promised to increase the number of childminders by offering one-time payments to those who join the profession, more funding for nurseries, and increasing the allowable ratio of carers to children. Childcare support for parents wanting to move into work or to increase their hours will be paid upfront rather than in arrears, helping them to bridge the gap. More funding for wrap-around care in schools will come too, with an aim to ensure all schoolchildren can be looked after before and after school if parents are at work by 2026.
Stability, now growth?
Mr Hunt’s last budget was a grim, but necessary, reaction to a crisis. This budget tried to be more positive and more proactive, but with real incomes still declining, strikes continuing, and his party sitting 20 points behind Labour in the polls, one wonders how much it will change the political narrative.
Tory “Trussite true believers” will argue the only way to change the party’s fortunes will be sweeping tax cuts. But Mr Hunt will say such a move isn’t possible and even downright irresponsible.
The Conservatives will hope the free childcare extension will make a noticeable, positive impact on people’s lives before the next election. And the Chancellor himself will hope growth and tax returns will be better than predicted, sufficient to allow him to announce something really big this time next year.
Mr Hunt concluded by saying on the economy, “the optimists are right.” The government will have to be optimistic about its prospects for staying in office, in the face of a distrusting electorate, a still ailing economy, and unfulfilled potential.
By Rolf Merchant, Director at Audley