Britain’s chancellor Jeremy Hunt has had the unenviable task of restoring the country’s bruised economic credibility. In response to financial market turbulence unleashed by the profligate and shortlived Liz Truss government, he outlined tax hikes and spending cuts to the tune of £55bn in November — the largest fiscal belt tightening in over a decade — which set the UK’s debt back on to a sustainable path. His job is still challenging: in this week’s Budget, he must find ways to boost the country’s lacklustre economic growth amid limited public finances, watchful markets, and political pressures.
The chancellor has little space to loosen the purse strings. High debt, low growth, elevated interest rates, and uncertainty in the economic outlook mean Hunt needs to avoid spooking bond markets with significant unfunded tax cuts or spending. A near-term windfall could, however, give him some wriggle room for one-off measures, even if the space for permanent loosening is tight. Indeed, borrowing has come in below expectations thanks to better-than-forecast growth, stronger tax revenues, and lower expenditure on energy price support as wholesale gas prices declined.
Within this confined room for manoeuvre, the acid test for any Budget measure should be whether it improves the underlying growth performance of the economy. After all, Britain’s subdued economic growth prospects make its debt dynamics even worse, since growth is vital to raising revenue.
One priority should be support for business investment, which has stalled since 2016. Next month corporation tax will jump from 19 to 25 per cent, just as a “super-deduction” tax allowance expires. Hunt should begin to phase in full expensing of investment, and research and development tax credits for innovative smaller businesses must also not be diluted as planned. Stability in the corporate tax system will then be important. The long-run productivity gains from investment incentives should help offset their upfront costs.
Support for Britain’s workforce is also important. There are still over 500,000 more economically inactive people than in early 2020. Hunt will introduce welcome measures to help move the sick, disabled, parents and older workers back into jobs — including improved childcare assistance for low-income households. Reforms to pension allowances to encourage older workers to return to, and remain in, work are also positive. Boosting training opportunities should not be overlooked either.
Hunt faces several immediate demands too. He is expected to extend a subsidy for household energy prices, rather than taper it as planned. This makes sense given the high cost of living. But a more targeted, and less expensive mechanism to support the most vulnerable would have been better. Meanwhile, a likely fuel duty freeze — at a cost of around £6bn — is politically totemic but undermines the government’s climate ambitions. Without these outlays the government would have more leeway to resolve the public sector pay disputes and boost defence spending.
Given short-term pressures and tight finances, the chancellor may only be able to make incremental efforts to support investment and the workforce. He will also need to manage the fallout from Silicon Valley Bank’s collapse now too. He may hope that fiscal improvements at the Autumn Budget and beyond, just ahead of an election, allow for more ambition. At the very least Hunt has to show at this Budget that his so-called 4Es — of enterprise, education, employment and everywhere — are more than a slogan. They must be underpinned by concrete plans. Wednesday’s speech may not be as eventful as recent announcements but it will be no less important.
