If it’s headlines he’s after, Jeremy Hunt has a tough act to follow when he delivers his budget on 15 March. It would be quite something for the chancellor to make as big a splash as his predecessor Kwasi Kwarteng did with his package of measures last September.
Hunt will not mind having a lower profile. If the budget makes a few ripples rather than sending a tsunami through the financial markets – as Kwarteng’s tax cuts did – then so much the better. Anybody expecting a giveaway package next week is certain to be disappointed.
The markets have calmed down after Liz Truss’s ill-fated and brief premiership, but the strikes planned for budget day involving transport, health, education and the civil service tell their own story. Britain’s cost of living crisis is making people poorer and angrier.
As a result, Hunt has some difficult choices to make. Here are five things to look out for.
How’s the economy doing?
The short-term prospects for growth and the public finances have improved since Hunt delivered his autumn statement in November. Britain appears to have escaped a recession in the second half of 2022 by a whisker, consumer spending has held up better than expected despite the cost of living squeeze, and business surveys have picked up. The Office for Budget Responsibility is expected to announce that the UK will have a shorter and shallower downturn than it was pencilling in last November and will reduce its estimate of government borrowing this year. On some estimates, Hunt will have an extra £30bn at his disposal. The Treasury says stronger growth now means slower growth later and that it can’t rely on the good news on borrowing persisting.
What next for investment incentives?
Business is about to be hit by a double whammy because from April the generous regime to encourage investment – the super deduction – expires at the same time as corporation tax rises from 19% to 25%. The super deduction has meant that for the past two years companies have been able to cut their tax bill by 25p for every £1 they invest, and Peter Spencer, a York University economist said he expected Hunt to come up with a successor scheme. “Given the uncertainties caused by Covid-19 and Brexit, I would have expected manufacturing investment to have plummeted but it has held up remarkably well.” Spencer expects Hunt to announce that there will be a 50% first-year allowance for spending on plant and machinery, and it would be a big surprise if the chancellor did not respond to the strong lobbying from business.
Will Hunt provide additional help with energy bills?
The Treasury’s insists that no decision has been made on whether to extend the energy price guarantee that aims to limit the average household annual bill to £2,500, but this looks like another nailed-on certainty. For one thing, the political optics of delivering a tax break for business while doing nothing for consumers are not great. For another, the cost of subsidising bills has come down sharply over the winter as wholesale gas prices have dropped sharply. Finally, as things stand, Hunt would only need to extend the support by three months – and at a cost of £3bn – before falling prices bring annual household bills below £2,500. Torsten Bell, of the Resolution Foundation thinktank, said: The chancellor rightly wants a calmer, smoother budget, while households – particularly those on lower incomes – need smooth energy costs. On both counts it doesn’t make sense for the government to put energy bills on a rollercoaster this spring.”
Will Hunt use the budget to end the strikes?
The chancellor could decide to use some of the leeway provided by borrowing coming in £30bn below its November forecast in an attempt to buy off striking workers, and there are good reasons for doing so. The widespread industrial action is leading to weaker economic activity, the disruption to the NHS makes it harder for the government to reduce waiting lists, and the battle for hearts and minds has so far been won by workers not ministers. Even so, Hunt’s view is that public sector pay is a separate process and he is reluctant to interfere with the workings of pay review bodies. The Treasury may well be allowing spending ministers more flexibility to settle the pay disputes, but the chances of Hunt using the budget to announce a government climbdown are remote.
What’s in it for the consumer?
Apart from the expected help with energy bills and the freezing of fuel duty for motorists, this is not going to have much in it make voters feel good. The budget marks the start of the second phase of the government’s three-part plan for the economy. Phase one was about emergency action deemed necessary to shore up the UK’s financial position after the Truss crisis. Phase two is designed to boost the economy’s long-term growth potential, with the budget including measures – perhaps through changes to pension rules – to encourage older workers back into the labour market. Only in phase three, once the recession is over and inflation is closer to its 2% target, does Hunt see himself having the scope for personal tax cuts. Even the “jam tomorrow” approach depends on there being no more nasty shocks over the coming months.
