In 2020 it was the global pandemic. In 2022 it was Russia’s invasion of Ukraine. This year’s budget took place amid fears of a fresh global banking meltdown.
Jeremy Hunt only made a glancing reference to the collapse of Silicon Valley Bank but as he was speaking, share prices in London were crashing amid fears that Credit Suisse could be the next domino to fall. The risks of a repeat of the global financial crisis of 2008 underscores the importance of not reading overmuch into the slightly rosier forecasts for the UK outlined by the chancellor.
To be sure, the chancellor will be relieved that the independent Office for Budget Responsibility now thinks the economy will just about avoid the two consecutive quarters of falling output that would denote a technical recession, and that growth will be stronger in the likely pre-election year of 2024 than predicted last November at the time of his autumn statement.
But doing less badly is not the same as doing well. Hunt said he was delivering a “budget for growth” – a refrain that has been heard many times by Conservative chancellors over the past 13 years. The reality is that the UK is battling against three powerful headwinds: rising interest rates, rising taxes and a cost of living crisis. It could certainly do without the added pressure of a credit crunch caused by bank failures. Despite the chancellor’s bullish performance, living standards are on course for their biggest two-year fall since the mid 1950s while taxes as a share of national income will be at their highest since the second world war by 2027-28.
After announcing tax and spending changes last autumn that will eventually raise more than £50bn, Hunt was in a more generous mood this time. The budget represented a £22bn giveaway – including tax breaks for investment, a freezing of fuel duty, a three-month extension of the energy price guarantee and extra defence spending. The other big announcement – the expansion of free childcare – will not start costing the Treasury serious money until the following financial year.
Almost all the big moves had been pre-announced and were, to a large extent, inevitable. Hunt had little choice – given April’s rise in corporation tax from 19% to 25% – but to provide businesses with incentives to invest. He did so by allowing businesses to write off 100% of their capital spending against tax for the next three years, and to signal that he would like to make the arrangement permanent if possible. That was sensible given the UK has the lowest business investment in the G7.
But having been generous to business, Hunt had to offer something to consumers struggling to make ends meet. Hence the help with energy bills and the freezing of fuel duty.
The chancellor is assuming there will be no new adverse shock to the economy between now and the election – and he needs to be right about that if he is going to be able to deliver a voter-friendly pre-election budget in a year’s time and still stick by his own rules for the public finances.
The OBR is more upbeat about the prospects for the economy than most other forecasters, but it says the chancellor will hit his primary fiscal goal – debt declining as a proportion of GDP within five years – with only £6.5bn to spare by 2027-28. That’s the smallest amount of wriggle room any chancellor has had since the OBR was set up in 2010.
So, yes, things are looking better than they did last autumn and that has given Hunt breathing space and the money to introduce his growth plan. But that plan is just a first step. It could easily – and quickly – be blown off course.
