Highlights
As a whole, the package contains few real surprises and should leave financial markets broadly unchanged, which will be just what Chancellor of the Exchequer Jeremy Hunt will have been hoping for.
With the budget deficit unacceptably high but, according to the latest data, undershooting the previous forecast made by the independent Office for Budgetary Responsibility (OBR), there was only ever going to be limited room for fiscal manoeuvre. However, with the Conservatives (21 percent) being trounced by Labour (51 percent) in the latest IPSOS opinion poll and a general election likely in 2024, some sweeteners aimed at the voting public were always on the cards.
To this end, government support for energy bills (the Energy Price Guarantee) due to expire at the end of March will be extended for another three months. This will keep the average annual household energy bill capped at £2,500 through June and help to reduce inflation. Similarly, the temporary 5p fuel duty cut announced last March and also due to expire this month will be retained for further 12 months and some beer duties will be frozen. Childcare support will be boosted and the total amount workers can accumulate in their pension savings before paying extra tax (the lifetime allowance) will be raised significantly as part of a suite of measures aimed at boosting employment. In the same vein, the work capability assessment will be abolished to help the disabled to work without losing benefits. These measures reflect a government that is desperate to tackle a sizeable pandemic-induced hole in the labour market there are about 6.6 million working age adults who are classed as economically inactive, an increase of more than half a million people in the last three years. Both the BoE and Treasury see current inactivity rates as both a major hurdle to the economy's productive potential and a key factor helping to boost wage growth
For industry, there will be full capital expensing for business investment for at least three years whereby every pound of investment will be deductible in full from taxable profits. This is worth an estimated £9 billion a year. There will also be 12 new investment zones as part of the levelling up programme. However, the planned increase in corporation tax from 19 percent to 25 percent on profits in excess of £250,000 in April will go ahead.
In terms of the economy, unexpectedly firm data at the start of the year mean that the OBR no longer expect a technical recession in 2023. The forecast contraction in GDP is now put at only 0.2 percent and will be followed by positive yearly growth of between 1.8 percent and 2.5 percent through 2027. The medium-term potential growth rate is unchanged from the November projection but the level of potential output and actual GDP at the end of new forecast is around half a percent higher. Headline inflation is seen falling sharply from 10.7 percent in the fourth quarter of 2022 to 2.9 percent at the end of this year. The stronger growth and lower inflation outlook mean that the OBR now sees public sector net borrowing falling steadily from 5.1 percent of GDP in the current fiscal year to 1.7 percent in FY2027/28 by which time there should be a surplus on the current budget, so any borrowing then will be for investment.
In sum, today's Budget is focussed quite heavily on the supply-side of the economy and, as such, its success or otherwise will only become apparent over time. It remains a tight Budget with the tax burden projected to rise to 37.7 percent of GDP in 2027-28, a post-war high. Even so, the new forecasts for growth, inflation and public sector finances should not trouble investors and should similarly have little impact on tomorrow's BoE MPC decision.
With the budget deficit unacceptably high but, according to the latest data, undershooting the previous forecast made by the independent Office for Budgetary Responsibility (OBR), there was only ever going to be limited room for fiscal manoeuvre. However, with the Conservatives (21 percent) being trounced by Labour (51 percent) in the latest IPSOS opinion poll and a general election likely in 2024, some sweeteners aimed at the voting public were always on the cards.
To this end, government support for energy bills (the Energy Price Guarantee) due to expire at the end of March will be extended for another three months. This will keep the average annual household energy bill capped at £2,500 through June and help to reduce inflation. Similarly, the temporary 5p fuel duty cut announced last March and also due to expire this month will be retained for further 12 months and some beer duties will be frozen. Childcare support will be boosted and the total amount workers can accumulate in their pension savings before paying extra tax (the lifetime allowance) will be raised significantly as part of a suite of measures aimed at boosting employment. In the same vein, the work capability assessment will be abolished to help the disabled to work without losing benefits. These measures reflect a government that is desperate to tackle a sizeable pandemic-induced hole in the labour market there are about 6.6 million working age adults who are classed as economically inactive, an increase of more than half a million people in the last three years. Both the BoE and Treasury see current inactivity rates as both a major hurdle to the economy's productive potential and a key factor helping to boost wage growth
For industry, there will be full capital expensing for business investment for at least three years whereby every pound of investment will be deductible in full from taxable profits. This is worth an estimated £9 billion a year. There will also be 12 new investment zones as part of the levelling up programme. However, the planned increase in corporation tax from 19 percent to 25 percent on profits in excess of £250,000 in April will go ahead.
In terms of the economy, unexpectedly firm data at the start of the year mean that the OBR no longer expect a technical recession in 2023. The forecast contraction in GDP is now put at only 0.2 percent and will be followed by positive yearly growth of between 1.8 percent and 2.5 percent through 2027. The medium-term potential growth rate is unchanged from the November projection but the level of potential output and actual GDP at the end of new forecast is around half a percent higher. Headline inflation is seen falling sharply from 10.7 percent in the fourth quarter of 2022 to 2.9 percent at the end of this year. The stronger growth and lower inflation outlook mean that the OBR now sees public sector net borrowing falling steadily from 5.1 percent of GDP in the current fiscal year to 1.7 percent in FY2027/28 by which time there should be a surplus on the current budget, so any borrowing then will be for investment.
In sum, today's Budget is focussed quite heavily on the supply-side of the economy and, as such, its success or otherwise will only become apparent over time. It remains a tight Budget with the tax burden projected to rise to 37.7 percent of GDP in 2027-28, a post-war high. Even so, the new forecasts for growth, inflation and public sector finances should not trouble investors and should similarly have little impact on tomorrow's BoE MPC decision.
Definition
Global-FYI tracks critical developments fon the global markets including political news, special central bank announcements, and substantial moves in the financial markets.
Description
Major political events and special announcements by the global central banks can shift both the short-term and long-term outlooks for the global economy and financial markets.
