Chancellor Jeremy Hunt will be aiming for a safety-first Budget on Wednesday. This is after last year’s imposition of a 55bn-a/year fiscal consolidation in order to restore Britain’s credibility following the chaos caused by Liz Truss’s short-lived premiership.
Although the Budget will not be as large as Hunt’s Autumn Statements, he still wants to flesh out his plan to grow the UK’s economy sustainably.
He wants to be able to announce tax cuts that are favorable to voters and increases in public spending in the fall.
Hunt described his Budget on Sunday as a “back-to-work” statement. He told Sky News that he would “break down all the barriers that prevent people from working here in the UK”.
Hunt acknowledged that there weren’t easy steps to improve the UK’s economic prospects and stated it was a difficult road to climb the ladder of prosperity. Here are five things you should be aware of in the Budget.
The Office for Budget Responsibility is the independent watchdog responsible for preparing economic forecasts for the chancellor. It has to clean up the mess it made from November’s Autumn Statement.
The OBR was then too pessimistic about the short-term outlook of both the economy as well as the public finances.
OBR has predicted that there would be a contraction of gross domestic product by 1.4% in 2023. This is despite having forecasted it in November. However, they are likely to revise this higher to close to stagnation. The IMF expects a contraction of 0.6% at the moment.According to data from the Office for National Statistics, the public finances will be even better than expected. Public borrowing PS30bn is lower than OBR believed in 2022-23.
The OBR is expected to take away what it gives with one hand. This is because a smaller GDP contraction in a short-term implies that there is less potential for growth recovery later.
This means that the chancellor has little fiscal headroom to go against his main rule of having public debt as a percentage of GDP fall in 2027-28. In November, this headroom was PS9bn.
Hunt is essentially in a position to spend immediately to solve immediate problems but has little room for permanent tax cuts and increases in public spending.
Living costs in crisis
Although inflation seems to have reached its peak, households still feel the pinch as prices are higher than they were a year ago, and incomes aren’t keeping up. This will continue even though inflation is expected fall quickly.
Hunt will announce that the average household energy bill will be capped at PS2,500 per year starting April. This is in addition to plans to increase the level to 3,000. Hunt has a kitty to cover one-off, short-term expenses.Hunt is also poised to force energy companies to charge less well-off households with prepayment meters the same price for gas and electricity as they do families who pay monthly bills. This will end the prepayment penalty for poorer households.
Hunt will follow the lead of every Conservative chancellor since 2011 when he freezes fuel duties. Hunt will be charged approximately 5bn per year if he extends the temporary 5p per litre reduction from last years and rejects an inflation rise.
The chancellor will announce an increase in the annual PS40,000 cap on tax-free contributions to pensions. He will also increase the so-called lifetime allowance, which currently means that people are subject to tax charges if their pension savings exceed PS1mn.
Public sector salaries
This year’s lower borrowing should enable the government to pay more to striking workers in the public sector in 2023-24. These increases can be dated back to 2022-23.
Although the Treasury resists the demand for more money to stop the industrial action, recent talks between ministers and trade unions representing NHS staff suggests that a pay agreement could be in the works.Hunt also accepts he will have to pump billions of pounds more into the Ministry of Defence budget over the next two years to buy equipment and weapons, including ammunition, following Russia’s invasion of Ukraine.
It is possible that the Treasury will provide one-off funds to help curb the flow of migrants to Britain by providing funding for their plans to reduce the number of boats carrying migrants over the English Channel.
Measures for business
Companies will be focusing on the Budget’s key measures, which will include the amount of money Hunt spends in order to encourage investment. This has been stagnating since the Brexit vote.
Businesses are concerned that the government’s increase of corporation tax from 19% to 25% next month coincides with the expiration of its “super deduction” scheme which provided companies 130 percent tax relief for equipment purchases over two years.
The Budget will likely include some type of capital allowances that allow companies to write off qualifying expenses against their taxable profits.
It is expected that the Treasury will partially reverse its 1.3bn raid against research and development tax credits to small businesses, which was described in the Autumn Statement.
Hunt will restore R&D tax relief to companies that can show they have spent large amounts of research in areas like financial technology or artificial intelligence. Business groups strongly opposed the move.
Skills and employment
The OBR will likely have a grim message about the labour market. Companies in many sectors are having difficulty hiring.
It is becoming increasingly difficult to fill vacancies because many working-age people have retired during the Covid-19 pandemic. Others are on long-term sickness or disability benefits. Many mothers find it difficult to return work due to the high cost of childcare.
Mel Stride (work and pensions secretary) has led a review of the labour market shortages, how to address them and Hunt will set a goal to persuade hundreds of thousands more people to get into work.
Universal credit claimants will be encouraged to find work or to increase their hours by changing the welfare benefit. Some claimants may be coerced into attending more frequent meetings with work coaches.
Budget Day will see the publication of a white paper that will detail plans to eliminate the work capability assessment. This will allow people with disabilities to seek employment without risking losing their welfare benefits.
Parents will be able claim childcare costs on universal credits up front and not in arrears. A few hundred pounds will be added to the amount that people can claim for childcare under the welfare benefit.