- Investment Insights
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More generous than expected
Total spending announced in the budget was somewhat higher than economists had expected, increasing by £22bn in the coming fiscal year. Moreover, as well as one-off measures, longer-lasting policies mean spending will be around £10bn higher into 2028.
Immediate spending support
As expected, the Chancellor pledged more support for energy bills to the tune of £4.3bn this coming year. Most of that will support households, by extending the Energy Price Guarantee at its current level until June, with additional support for businesses. Fuel duty has also been frozen, with a cost of £4.8bn this fiscal year. These spending measures should improve GDP forecast somewhat this year, though household consumption spending is still expected to decline. Elsewhere, the Chancellor pledged an additional £2-3bn for defence spending in each year of the forecast.
A plan for participation
The Chancellor revealed a range of measures designed to boost the supply side of the economy, via increasing labour participation. In the 10 years preceding the pandemic, participation had been on the rise, peaking at 64% in 2019. However, three years on from the start of the pandemic, participation remains depressed. These measures include policies to get new parents back to work, incentives to keep older workers in the labour market and measures to support people with disabilities and those with long-term illness to re-enter the workforce. All in all, the Office for Budget Responsibility (OBR) expects these measures to add 100,000 workers by 2028.
Invest now delay later
While the Chancellor did go through with a planned rise in corporation tax and ending the 130% super-deduction on business investment, he did extend the latter scheme at a less generous rate. For a three year period, qualifying businesses can fully expense the cost of capital investment. This is expected to bring forward future planned investment, but is not expected to change the total amount of investment, unless the measure is made permanent.
What was missing
The main notable absence from the budget was funding to help boost public sector wages. Around £4bn had been expected to allow departments to raise public sector pay by around 5%.
More to come
The OBR upgraded growth forecasts significantly, expecting only a -0.2% decline in 2023 and growth of +1.8% in 2024. This increased the amount of spending the Chancellor could do within the existing fiscal rules of keeping borrowing below 3% of GDP and ensuring the debt-to-GDP ratio was falling in five years’ time. However, new spending announcements in this budget eat up over half of that headroom, leaving only £6.5bn left. Fortunately for the Chancellor, the rules do allow considerable flexibility, so the Chancellor may be able to announce more spending ahead of the next General Election, and the Autumn Budget could provide an opportunity to modify them.
Measures announced are likely to raise GDP growth forecasts in 2023, albeit by less than the OBR predicts. Stronger growth now is likely to make the case for moderately tighter monetary policy, increasing the likelihood that the Bank of England keeps rates higher for longer. The budget also impacts government bond issuance. Gilt supply will be higher this year, with issuance expected to be 40% higher than it was in 2022, at a time when the Bank of England was also selling gilts. Since this was well anticipated before the budget, the market response has been benign. Indeed, any impact from the budget has largely been overshadowed by ongoing anxieties regarding the stability of banks in the wake of the collapse of Silicon Valley Bank (SVB) in the US. Despite these jitters, we continue to expect the Bank of England to raise rates at the March meeting, given the improving outlook for UK growth and continued tightness in the labour market.
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