Spring Budget: Less Than One Month to Go
20. Feb. 2023
The UK Chancellor Jeremy Hunt will deliver his much anticipated Spring Budget on 15 March. What should you expect? The short answer is, nothing new. The Chancellor and the Prime Minister Rishi Sunak are determined to come across as sensible grown-ups managing the UK economy through the challenges of record inflation and energy prices, especially after the disastrous mini-Budget of former Prime Minister Liz Truss.
As such, we expect Hunt to say the plan is working and that he wants to stick with it. Hunt will no doubt point to recent economic data showing the UK economy defied forecasts to narrowly avoid recession as testament to the need to steer the course.
Hunt has been clear that the Government must prioritise tackling inflation, which is at a five-month low but remains stubbornly high at just over 10%. One of the five key tests Sunak has set for his government is to halve inflation this year, which the Bank of England and economists are expecting given the impact of high energy bills will reduce once we exit winter.
There is growing pressure from Conservative backbenchers and supporters of Liz Truss for Hunt to announce tax cuts. A former Cabinet Minister told your Polis UK analyst that ‘the decision of Astrazeneca to locate its new factory in Ireland rather than the UK because of the rate of corporation tax should come as a wake-up call to the Chancellor’. This influential Conservative MP said the planned increase in corporation tax to 25% on 1 April should be reversed and ‘move towards an even lower rate’ because ‘continuing at the current rate will only damage growth, and we can’t afford that,’ according to the MP. These views reflect a growing group of MPs, including Liz Truss, calling for tax cuts.
Yet Hunt is unlikely to bow to pressure from his own MPs on the grounds that tax cuts would only fuel inflation and further increase government borrowing. A senior tax director at a leading FTSE100 company told your UK analyst that he expects no announcements on tax cuts. The far likelier outcome is Hunt will announce tax cuts in his 2024 Spring Budget once inflation is down and importantly, in time for an election likely late next year.
The closest Hunt will get to tax cuts is by announcing an extension of a freeze to fuel duty on the grounds that this would help keep inflation under control. The political reality is Hunt would cause uproar on his backbenches if he did anything other than maintain the freeze, which is estimated to be worth £5.5 billion to the Treasury.
The Chancellor may also announce targeted personal tax cuts to encourage the 6.6 million people of working age currently not in full-time education or employment, into work. Hunt is considering relaxing the pension lifetime allowance, currently frozen to just over £1m until 2026, to encourage middle-aged people to top up pension contributions through work.
Other announcements readers should look out for are whether Hunt will ditch the Government’s current plans to reduce the basic rate of income tax from 20% to 19% in 2024 given His Majesty's Revenue and Customs (HMRC) have increased their cost estimates for the policy. The energy price guarantee, which currently caps annual household energy bills to £2,500, is set to rise to £3,000 on 1 April but Hunt may make a surprise announcement on energy support. The Chancellor may also bring forward plans to increase the state retirement age to 68. An announced increase in defence spending is unlikely but remains on the cards given the war in Ukraine and the fact inflation has eaten-away at the Ministry of Defence’s budget in real-terms.
What’s in it for you?
Real wages are down 2.5%, inflation remains in the double-digits and energy prices remain high. The rising cost of living is therefore acutely felt by most of our readers in the UK. Our UK-based readers will be directly impacted by what is announced in the Spring Budget and what is left out. Hunt’s decision on tax cuts will impact the size of your take-home pay and announcements on energy bills will also affect your disposable income. Those who own their business or are working in the private sector will also see rises in corporate tax bills, impacting how much businesses can spend on wage increases and job creation. Given our projections, those in full-time work should not expect to gain much out of the upcoming Budget. In fact, Hunt may announce that you will be working for longer, sooner than you might have expected.
Those UK residents currently not in work may gain from the Spring Budget given potential changes to pension tax-free limits. And readers who own their own car and filling it with petrol and diesel can at least not expect a further increase further in your fuel bill given Hunt is likely to maintain the fuel duty freeze.
Hunt’s sober approach to the economy and focus on reducing inflation will ultimately help tackle the cost of living, which readers in the UK will benefit from, as well as those based in countries exposed to the UK’s economic performance such as European trade partners. But if you are in the UK, don’t expect any cuts to your tax bill, or at least not until a year’s time. The upcoming election in 2024 should help make tax cuts next year a more realistic prospect, as the politics simply cannot be taken out of economic decisions affecting us all.