Jeremy Hunt hit a milestone this week by delivering his first Budget. Once upon a time, a chancellor delivering the annual Budget would be entirely unremarkable, but given his two predecessors did not last long enough in office to do so, the event felt more significant. Not only did the chancellor get to deliver a Budget but he also had a more positive economic story to tell, or at least upside news to talk about without sounding utterly ridiculous. After two years of forecast downgrades, missed targets and warnings of catastrophe to come the chancellor was able to present new numbers from the Office of Budget Responsibility, the Treasury’s arm’s length independent forecaster, pointing to improvement.
The biggest and most significant change since the OBR’s last round of forecasts in November has been a collapse in wholesale gas prices, which are down by more than 50%. That has lessened business costs, eased the squeeze on household incomes and directly lowered the government’s borrowing requirements. It was primarily that change in global energy prices that allowed Mr Hunt to say that inflation had peaked and that Britain was now expected to avoid a technical recession.
But if the economic picture looks less grim, one would be hard pressed to really say it looks good. The economy is still expected to end 2023 smaller than it entered it. Even after the drop in energy prices and even with some modest new income support packages, household real incomes are still expected to fall by 2.6% this year. The two year drop over 2022 and 2023 in living standards is still the largest on record. Unemployment is still expected to rise both this year and next. The OBR reckons house prices will fall by 10% over the coming 18 months as higher mortgage rates bite. In other words, for many firms and families 2023 is still set to feel like a recession.
The improvements in the forecasts were enough to hand Mr Hunt a windfall of around £25bn a year in terms of space for tax cuts or higher spending relative to his fiscal targets. He chose to spend around two thirds of that on his policy measures. Whilst a substantial chunk of that spending was on the expected freezing of fuel duty and more cash for the Ministry of Defence, Mr Hunt deserves praise for a series of reforms of the supply side aimed at addressing Britain’s structural economic problems.
The move to full expensing for capital spending is a sensible move given Britain’s chronic shortage of business investment since 2016. Although by time-limiting it to three years (even whilst hoping it can be made permanent), Mr Hunt has likely downgraded its effectiveness. In this case his desire to meet his fiscal target of a falling debt/GDP ratio has trumped his desire to boost growth in the medium term. The expansion of free childcare and the radical reforms of pension taxation to encourage more people to work are both aimed at addressing the labour supply shortage which has hampered growth over the last eighteen months. That said, the withdrawal of the cap on the size of pension pots is a bizarrely untargeted way of addressing a specific problem around a few thousand high earners and the expansion of childcare will be phased in over years rather than months.
The big picture is of a chancellor trapped between economics and politics. Britain’s productivity and growth performance over the last 15 years has been dreadful. It is that growth problem that has led to real median incomes being expected to be no higher in the mid-2020s than in the late-2000s and it is that growth problem which has led to the country having the highest tax take as a share of GDP in decades despite increasingly shaky public services. Still scarred by the experiences of last Autumn though, Rishi Sunak and Jeremy Hunt have placed a great deal of emphasis on proving that they are not Liz Truss and Kwasi Kwarteng. Truss and Kwarteng overreached, ignored the fiscal consequences of their actions and were far too bold in going for growth. Sunak and Hunt have over compensated and whilst recognising the growth problem are being far too modest in their attempts to address it. The end result is one of diminished expectations, a country where a forecast that the economy will shrink by 0.2% this year is ‘good news’ because it is not as bad as what was expected before.
Home >Articles > Spring Budget 2023: diminished expectations
Spring Budget 2023: diminished expectations
Jeremy Hunt hit a milestone this week by delivering his first Budget. Once upon a time, a chancellor delivering the annual Budget would be entirely unremarkable, but given his two predecessors did not last long enough in office to do so, the event felt more significant. Not only did the chancellor get to deliver a Budget but he also had a more positive economic story to tell, or at least upside news to talk about without sounding utterly ridiculous. After two years of forecast downgrades, missed targets and warnings of catastrophe to come the chancellor was able to present new numbers from the Office of Budget Responsibility, the Treasury’s arm’s length independent forecaster, pointing to improvement.
The biggest and most significant change since the OBR’s last round of forecasts in November has been a collapse in wholesale gas prices, which are down by more than 50%. That has lessened business costs, eased the squeeze on household incomes and directly lowered the government’s borrowing requirements. It was primarily that change in global energy prices that allowed Mr Hunt to say that inflation had peaked and that Britain was now expected to avoid a technical recession.
But if the economic picture looks less grim, one would be hard pressed to really say it looks good. The economy is still expected to end 2023 smaller than it entered it. Even after the drop in energy prices and even with some modest new income support packages, household real incomes are still expected to fall by 2.6% this year. The two year drop over 2022 and 2023 in living standards is still the largest on record. Unemployment is still expected to rise both this year and next. The OBR reckons house prices will fall by 10% over the coming 18 months as higher mortgage rates bite. In other words, for many firms and families 2023 is still set to feel like a recession.
The improvements in the forecasts were enough to hand Mr Hunt a windfall of around £25bn a year in terms of space for tax cuts or higher spending relative to his fiscal targets. He chose to spend around two thirds of that on his policy measures. Whilst a substantial chunk of that spending was on the expected freezing of fuel duty and more cash for the Ministry of Defence, Mr Hunt deserves praise for a series of reforms of the supply side aimed at addressing Britain’s structural economic problems.
The move to full expensing for capital spending is a sensible move given Britain’s chronic shortage of business investment since 2016. Although by time-limiting it to three years (even whilst hoping it can be made permanent), Mr Hunt has likely downgraded its effectiveness. In this case his desire to meet his fiscal target of a falling debt/GDP ratio has trumped his desire to boost growth in the medium term. The expansion of free childcare and the radical reforms of pension taxation to encourage more people to work are both aimed at addressing the labour supply shortage which has hampered growth over the last eighteen months. That said, the withdrawal of the cap on the size of pension pots is a bizarrely untargeted way of addressing a specific problem around a few thousand high earners and the expansion of childcare will be phased in over years rather than months.
The big picture is of a chancellor trapped between economics and politics. Britain’s productivity and growth performance over the last 15 years has been dreadful. It is that growth problem that has led to real median incomes being expected to be no higher in the mid-2020s than in the late-2000s and it is that growth problem which has led to the country having the highest tax take as a share of GDP in decades despite increasingly shaky public services. Still scarred by the experiences of last Autumn though, Rishi Sunak and Jeremy Hunt have placed a great deal of emphasis on proving that they are not Liz Truss and Kwasi Kwarteng. Truss and Kwarteng overreached, ignored the fiscal consequences of their actions and were far too bold in going for growth. Sunak and Hunt have over compensated and whilst recognising the growth problem are being far too modest in their attempts to address it. The end result is one of diminished expectations, a country where a forecast that the economy will shrink by 0.2% this year is ‘good news’ because it is not as bad as what was expected before.
