13 Mar 2023

Political Insider: What to expect from the Budget

On Wednesday, Chancellor Jeremy Hunt will deliver his first full budget. The stakes, politically and economically, could not be higher. So, what do we expect him to announce?

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The primary focus will be on measures designed to help the Government achieve its economic plan; to halve inflation, grow the economy and reduce the public debt – all underpinned by a plan to get Britain ‘back to work’.

While that overarching shape and narrative is set, we understand that there are still last-minute negotiations ongoing around the scale of reform and expenditure in some areas – with the political imperative to act boldly on issues such as childcare contending with the fiscal realities. The Chancellor wants to steal some of Labour’s clothes without footing the whole of the bill for them – ultimately there is a balance of ambition and risk to be struck.

Hunt will seek to reset public perceptions of the Government – after a sub-optimal fiscal moment last year led to a collapse in public opinion – whilst maintaining and rebuilding a narrative around his party’s commitment to ‘sound money’. It is a tightrope he needs to walk on Wednesday.

We expect the Chancellor to maintain the tight fiscal environment established during the Autumn Statement, with an economic plan focused on the ‘four Es’ (enterprise, education, employment and everywhere) to unlock economic growth and productivity, tackle perceived weaknesses in the UK economy, and deliver investment to signal the Government’s priorities over the medium-term.

Enterprise

The Chancellor has previously stated it is the Government’s ambition to have “the most competitive tax regime of any major country”, and his 2019 leadership campaign featured a pledge to reduce the corporate tax rate to 12.5 per cent. However, April’s planned rise in corporation tax from 19 per cent to 25 per cent looks set to remain, despite pressure from Tory MPs such as Liz Truss and Priti Patel, with some even calling on the UK to withdraw from the OECD’s Pillar 2 which demands a minimum corporation tax rate of 15%.

The Chancellor will however likely use the budget to set a new capital allowances regime for businesses to replace the £25 billion “super-deduction” tax break – a two-year measure offering 130 per cent tax relief on companies’ equipment purchases – as the scheme closes. This may give him an opportunity to offset an increase in corporation tax, with generous investment incentives, which could be spun as an effective reduction for those investing in the UK.

In a boon to hospitality businesses, Alcohol Duty looks set to be frozen. Whilst there is speculation that the Chancellor may use some of his fiscal headroom to extend the 5p fuel cutfor another year.

Employment

Post-pandemic, the Government estimates that there are around 6.6 million people of working age who are “economically inactive”, only a quarter of whom are actively seeking employment. This has been identified as a major barrier to growth.

With many industries struggling to tackle labour shortages and with increased numbers of workers retiring early, the Chancellor is looking at increasing the tax-free allowance on pensions. This move will likely be welcomed by many senior Tories and the Conservative Growth Group who have pushed for reform to the so called “Doctors’ Tax”. The state pension age is likely to be raised, already set to increase to 68 from 2044 to 2046, a review will likely recommend implementing this significantly earlier.

It is expected that Jeremy Hunt will announce the reform of the system used to assess eligibility for sickness benefits. This reform to the welfare system will mean claimants can continue to receive the payments after they return to employment.

This will allow claimants to move into work without the fear of being reassessed and potentially losing their benefits. The process is expected to be replaced with one that asks claimants to demonstrate what job they might be able to do.

Education

Another way the Chancellor is likely to tackle skills shortages is through targeted back-to-work reskilling programmes and reforms to the Apprenticeship Levy – designed to encourage businesses to invest in programmes across all age groups without hindering the productivity of employees.

As part of the Chancellor’s plan to break down barriers preventing participation in the labour market, support for childcare costs will be paid upfront by the Government for those on universal credit.

For the past several years, the support available has been frozen at £646 each month, despite the cost of care continuing to rise – the UK ranks among the most expensive in the world. The Chancellor will increase the maximum amount claimable by several hundred pounds and, in return, benefit claimants will need to attend meetings with work coaches more frequently and participate in skills boot camps designed to help them get back to work.

There is some talk that the Chancellor may layout ambitions for even bolder reforms on childcare, extending free provision to younger children than the current system. While a headline grabber, in line with the broad objectives of the budget, such a move would reflect a decision to take a more bullish fiscal stance.

Everywhere

We are likely to see a significant development in devolution, with plans to hand metro-mayors like Andy Street and Andy Burnham significantly more power and allowing the authorities to operate like Whitehall departments. This will involve the mayors receiving budgetary control in areas such as education, transport and housing. The move will be welcomed by Conservative critics of the implementation of levelling up policy up to now and offer the Conservative party an alternative to the place-based policies espoused by Labour in the past few months.

Following the publication of the Skidmore review at the start of 2023, the budget also offers the Government an opportunity to showcase its green credentials and commitment to achieving net zero carbon emissions. Reducing inflation remains a critical priority for the Government, so we do not expect the announcement of new green taxes will increase costs faced by businesses or consumers.

The Chancellor will announce a £20 billion investment in carbon capture technology– to help reduce Britain’s industrial carbon emissions and create highly skilled jobs. Recent international developments in the form of the Inflation Reduction Act in the US and the REPowerEU deal underline the changing clean energy landscape, and failure to act now could result in the UK falling behind in capitalising on the transition to spur economic growth.

Labour’s response

In Labour’s response to the budget expect plenty of focus on the net zero agenda as a means of promoting economic growth – through their “Green Prosperity Plan”. It plans to put the UK at the head of the green revolution, targeting the most deprived regions with a public-private investment scheme similar to those championed by the Biden administration. A lack of coordinated government action will face criticism from Labour, who have already committed to investing £28 billion per year on climate measures.

Labour will also savage the Government if proposals on childcare are seen as incremental – Labour strategists have identified the issue as a massive weakness for the Government and as a huge potential vote winner for them. They will go heavy on it if the Chancellor does not have a significant package to offer cash-strapped parents.

MHP will be providing bespoke client updates and analysis on budget day to keep you informed as the Chancellor announces measures that impact your business.

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