Asset Intelligence Comment: Budget 2023

Well, Jimmy Carter did not stay President for long after that. Rishi Sunak and Jeremy Hunt must be praying that the Conservatives can somehow avoid the same fate in next year’s general election. 

Because while things appear less bleak than they did a few months back, the independent state forecaster the Office for Budget Responsibility (OBR) was clear. Real household disposable income is still on course to fall by a cumulative 5.7% between 2022 and 2024 – the biggest two-year decline since records began in the 1950s. 

News that the UK is now projected to avoid a recession are likely to prove cold comfort for people continuing to struggle to pay the bills and keep a roof over their heads. (By the way, we will achieve this feat, according to the OBR, by shrinking in the current quarter and achieving zero growth in the second, thus interrupting two the consecutive quarters of shrinking output which constitute ‘a recession’. The UK economy is still projected to decline in size by 0.2% over 2023 as a whole.) 

So the backdrop for the government, the UK economy and most importantly, ordinary citizens, remains challenged. It is also worth noting that OBR forecasts take account of policies contained within the Budget statement. So the improved childcare policies, greater pensions freedoms and new ‘investment zones’ are clearly not expected to have transformative effects. Perhaps the innovation of allowing businesses to fully offset their capital investments against their taxable profits might have landed with a greater punch had there been a clear commitment to continue it beyond a three-year period? Investment, in all forms, loves certainty. Just a thought.

(Incidentally, can anyone recall a Chancellor who did not launch some variation of the ‘Investment Zone/Enterprise Zone/freeports’ theme? Even the short-lived Kwasi Kwarteng got one in…) 

Meanwhile, the silent squeeze from frozen tax thresholds continues to deepen. The Chancellor announced no increase to ISA contribution limits or to income tax levels. The latter in particular is a major revenue-raiser for the Treasury at a time of high nominal wage rises, dragging more and more people into higher tax bands.

At least the screws from inflation should start to loosen shortly, according to the OBR. Annual price rises are now projected to slow from the current level of 10.1% to 2.9% by the end of the year, which if realised should feel like a welcome return to normality. 

Progress on inflation will be aided by the Chancellor’s decision to retain the government’s Energy Price Guarantee at the level of £2,500 for a typical household’s use, rather than reducing support to a bill cap of £3,000 next quarter as previously planned. 

This is a welcome and sensible move, especially as the wholesale cost of gas has fallen sharply in recent months and thus eased the burden for the government. Yet lost in some of the commentary is that bills will still rise next month, as the £66- or £67-a-month government discounts applied since October have now come to an end.

Jeremy Hunt is working within difficult constraints during his time as Chancellor and it is fair to say that that limits his room for manoeuvre. Yet while many of the policy changes made within this Budget will have major benefits for individuals facing specific issues – particularly around pensions and childcare – it is less clear that they will have a big impact on either the macroeconomy or the living standards of the broader population.

On the face of it then, the urbane and well-to-do Rishi Sunak appears to have little in common with the former peanut farmer from Georgia. But they could well both go down in the history books as being felled by the same tricky question…  

The key measures in Jeremy Hunt’s Spring Budget announced for England (national variations for Scotland, Wales and Northern Ireland may apply)