As the Chancellor prepared for his Autumn Statement back in October, the big question was how to reassure markets and put public finances on a sustainable footing again, while protecting the country against energy price shocks and not stifling growth. Striking the right balance was an unenviable task.
As we head towards the Spring Budget, some of the clouds have begun to clear. A fall back in wholesale gas prices will push down the rate of inflation – gradually at first, then rapidly as we move into the second half of 2023. The Office of Budgetary Responsibility (OBR) expects inflation to ease to 3.8% by Q4 2023, while the Bank of England has forecast a similar level of 4%. Halving inflation is one of the Prime Minister’s five key priorities.
However, a drop in inflation isn’t the same as a fall in prices. One of the main reasons why the inflation rate won’t come down significantly until the latter part of the year is that it’s compared to prices 12 months before. In the case of gas, these rose through much of H1 2022, but didn’t peak until Q4. Prices will still feel high for many hard-pressed consumers and businesses, even if they aren’t going up by as much as 2022, especially as Government support for energy bills is being reduced.
Pay demands will gradually fall, but with a lag
Any fall in consumer price inflation will be welcomed by businesses trying to contain the pressure on pay. But according to Bank of England research, pay demands tend to follow workers’ expectations of inflation. If inflation is slow to come down, then today’s 7% plus private sector pay rises could persist for some time yet, with the risk that the Bank of England will further raise interest rates as a result.
Upward pressure on wages and hence labour costs and prices is also being sustained by skills shortages and a working age inactivity rate of more than 20%. However, our analysis indicates that around 300,000 British workers will rejoin the workforce in 2023.
Mixed news on growth and debt
Further good news for the Chancellor centres on the below OBR forecast borrowing levels and the £35.1 billion self-assessment tax receipts in January (£5.8 billion above OBR forecasts). This is a notable step forward for a Government that lists reducing public debt as another of its five top priorities.
Looking ahead, however, Government borrowing costs will be higher than expected as some of the debt interest is linked to inflation. In the Autumn, the OBR had forecast that inflation would move into a deflationary or negative territory after this year. But now we expect its forecast to align with the Bank of England’s expectation that inflation will fall, but remain around the 2% target over a prolonged period. The implication of this is that debt interest payments for the public debt are likely to pick up faster than what the OBR had initially expected.
Moreover, the outlook for the economy in the medium-term remains fragile, which will curtail tax receipts and room for any possible cuts. In a speech in January, the Chancellor cited PwC research which shows that the UK is now the third-most attractive country for CEOs expanding their businesses. But he also acknowledged weaknesses: “Structural issues like poor productivity, skills gaps, low business investment and the over-concentration of wealth in the South-East have led to uneven and lower growth. Real incomes have not risen by as much as they could as a result.” Our projections underline the regional imbalances, with London and Northern Ireland being the only two UK regions likely to exceed pre-pandemic levels of economic inactivity in 2023.
The Windsor Framework offers the prospect of closer ties with the EU ahead. But businesses may need to wait until the UK-EU Trade Cooperation Agreement comes up for re-negotiation in 2025 before they feel the benefits in areas such as export red tape and access to talent.
Stability and prudence remain the watchwords
If we put all these trends and indicators together, it’s highly likely that the Spring Budget will once again prioritise stability and prudence. Headline rates of corporate and personal taxation are likely to remain largely unchanged. Many businesses will welcome reduced upheaval on the domestic taxation front, especially when there are so many international tax reforms coming up on the horizon.
What the Chancellor could announce is a number of targeted measures. Chief among these would be extra healthcare support for older workers who have been forced to stop work because of illness, disability or mental health issues. There could also be increased investment in skills training for people over 50. Analysis of Office for National Statistics data carried out by Rest Less, the over-50s advocacy group, indicates that more than 1.6 million people aged 50 and over are unable to work because of long-term sickness. Enabling these people to return to the workforce would offer the win-win of higher tax receipts, reduced benefit bills and an easing of skills and labour shortages.
Further interventions to help support businesses and growth could include a continued freeze on fuel duty to help businesses and consumers make ends meet in the short-term while stepping up incentives for research and development and net zero transition in the longer term. My colleagues discuss the policy options further in the second of our Budget Special articles. For households, it is highly likely that the Chancellor will continue to provide support to households through delaying the increase in the Energy Price Guarantee (EPG).
It all hinges on growth
All this still leaves one fundamental question – how to address the structural weaknesses within the economy and boost growth in the medium- and longer term. The most far-reaching parts of the Budget are likely to be what the Chancellor says in this respect as he promotes the four Es of enterprise, education, employment and everywhere he believes are critical in unlocking our national potential.
Join us for The 2023 Spring Budget
Visit our dedicated Budget page on 15 March 2023 to view instant response to the announcements from our team. Register to attend our webcast at 9am on 16 March for a full debrief with our specialist panel who will discuss what the announcements mean for individuals, employers and businesses.
Contact us
