If he’s got this right, there may be room for more giveaways before the election
IT was a sharp improvement in Britain’s economic prospects that provided Jeremy Hunt with the cash he hopes will fix bottlenecks in the post-pandemic labour market.
He used much of it to help parents with childcare problems and introduce far more generous pensions allowances, in an attempt to get Britain back to work.
If Hunt manages this, it should free up the market for jobs which, in turn, would dampen wage demands and put the brakes on inflation. And if the Chancellor can then deliver on his revised forecasts for growth and prosperity, he could have some budgetary space to deliver personal tax cuts closer to the next election.
It is true that he refused to rescind the jump in corporation tax from 19 per cent to 25 per cent. But he did introduce generous tax allowances for firms to invest in plant, factories and IT. He clearly aims to light a fire under enterprise and endeavour with more assistance promised for the City and sciencebased commerce in the autumn.
THEREshould be relief up and down the land that the recession so confidently projected by the Bank of England and the independent Office for Budget Responsibility (OBR) has been averted.
Even the often gloomy OBR acknowledges that the economic and fiscal output ‘has brightened’. And one reason for this is the prediction that the cost of living crisis should dissipate by the end of this year, with inflation falling from a peak of 11.1 per cent in October 2022 to just 2.9 per cent.
This forecast should strengthen the Government’s arm in its battle over wage demands with politically motivated unions, which predictably chose Budget day to whip up strikes, crippling services from transport to the NHS. Nevertheless, it is too early to pop the corks. Economic output is forecast to shrink by 0.2 per cent before it accelerates to 2.5 per cent by 2025. And the economy’s fragile state has been underlined by the latest earthquake to sweep through the global banking system.
The failure of Silicon Valley Bank in the United States led to the rescue of its British arm by our biggest bank, HSBC.
Even if further failures can be contained, banks may now be less willing to lend and this could clog up the financial plumbing network which is the key to growth.
For now, though, after a strongerthan-expected economy last year, and improved forecasts in the years leading up to 2027-28, the Chancellor has some £88bn in unanticipated spending power.
He has chosen to focus most of this on helping struggling parents with childcare costs; on scrapping the limit on tax- free, life- time allowance for pension pots and increasing the cap on annual taxfree pension contributions to £ 60,000; and on offsetting the impact of the corporation tax rise.
The extension of childcare allowances alone will cost the Exchequer some £17bn over the next five years. As for the pain of the six percentage-point rise in corporation tax, it will partly be eased by the 100 per cent tax relief for new investment at a cost of as much as £28bn. The OBR is hopeful that this could restart stuttering business investment which has never fully recovered from Brexit uncertainty, Covid-19 and the impact of Vladimir Putin’s unprovoked invasion of Ukraine.
Much of the improved outlook is down to the extraordinary resilience of Britain’s hi-tech, life- sciences, financial services and creative industries. And it takes the pressure off the public finances, with borrowing expected to fall much more quickly than expected. The current budget, before infrastructure investment, should be back in surplus by the end of the forecast period in 2027-28.
Public sector debt will remain at historically high levels but the UK can draw comfort from the fact that it is considerably lower than that of several of our competitors, including the US, Japan and France. The improved health of the public finances allowed the Chancellor to help ease the cost of living crisis by retaining the freeze on fuel duties and slashing beer prices in pubs.
HEclearly believes that the tens of billions of pounds raised by the rise in corporation tax, together with the harsh freeze on personal tax allowances, is a price worth paying to lower Britain’s borrowing requirements, and ensure a stable pound as well as a healthy market for UK government bonds. He thinks tax breaks to encourage investment are more important to UK manufacturing than any attempt to have the lowest rate in Europe.
Smaller and innovative firms will have to wait until the autumn for details of the Chancellor’s drive to release enterprise. But he is making critical down payments in the shape of more generous allowances for research and development and for the film, video and other creative industries. What is more, his promise to compete directly with America’s subsidies for new tech production shows how serious he is about underpinning the UK’s science-based economy.
Hunt, a long- distance runner, doesn’t have time to play the long game with the economy. But there is every chance that if his forecasts prove correct, there may be room for more giveaways before Britain next goes to the polls.