By James Thompson, Lizi Hopkins, and JP Spencer
This week, Chancellor Jeremy Hunt delivered his Spring Budget speech to the House of Commons. You can read it for yourself here. But in case you don’t feel like going through the full 122 pages just yet, we’ve come away with four takeaways.
Takeaway 1: Two routes to growth
Whilst international factors and some Government measures have allowed the Office for Budget Responsibility to count out the prospect of a technical recession this year, the UK’s projections for growth are weak. The Chancellor, through the framing of his 4 ‘E’s for economic prosperity, used the Budget to address two structural barriers to growth: the tight labour market, and low business investment.
Policies around the free provision of childcare for 1-2 years olds are intended to get parents back to work. Similarly, the changes to the pension allowance are aimed at disincentivising labour market exit; the policy is targeted towards retaining high earning over 50s, such as NHS doctors, in the labour market. Though in trying to solve one problem, the Government risks leaving itself open to the damaging attack line that its pensions changes only benefit the top 1% of earners, at a time when average living standards are set to decline more than at any time since the 1950s.
To stimulate business investment, the Chancellor announced a three-year temporary increase in capital allowance for business investment, with full expensing. This dual focus on labour supply and business is likely to be one that the Treasury returns to in coming months, as the country grapples with low growth and a projected -6% fall in household living standards.
Takeaway 2: Even four ‘E’s can’t address everything else you would normally see in a growth plan
Whilst the Budget was billed as a plan for growth, in reality it was a Budget for stability, with a less bad but still challenging economy, and some significant, but narrow initiatives to tackle specific structural constraints. There was little on other key elements of a growth strategy, such as: industrial strategy; infrastructure (where there were no significant announcements); housing and planning; and net zero transition investment, to match the Biden and EU plans. Nor was there much on the challenges facing public services, although progress is now underway on public sector pay deals.
Takeaway 3: Tough choices for the future
This budget makes clear that whoever wins the next election will have some tough choices to make on the public finances. The Government’s target to have debt falling in the final year of the forecast has just £6.5bn of headroom in 27-28 – not a lot when national debt will be almost £3 trillion. Bravely, this assumes the fuel duty increase will go ahead, day-to-day public spending grows at 1% in real terms from 2025 and capital spending faces real-term cuts.
The cost of the childcare announcement is set to hit public finances post-election alongside these tight spending plans, which means some big risks for the Government or for the opposition to inherit depending on what happens at the next General Election. Speaking of the opposition, Labour’s response focused on their five missions – their goal for the highest economic growth in the G7, on fiscal responsibility and a need for stability in Government policy, as well as the need for a renewed industrial strategy.
Takeaway 4: Devolution here to stay
In the spirit of delivering on the Levelling Up White Paper commitments, the Chancellor announced the agreement of two ‘Trailblazer Devolution Deals’ with Greater Manchester and the West Midlands. The deals, each worth approximately £1.5bn in funding and fiscal measures, devolve further powers and streamline funding processes. Greater Manchester and the West Midlands will have additional powers and responsibilities around transport, skills, housing and retrofit, and will be able to seek funding from a multiyear single settlement, rather than through the current fragmented funding structure. Many of the commitments are laying down a marker for further devolution in the future through the next Spending Review period, when the Combined Authorities will have more of a Government Department style negotiation with HM Treasury. This will mean that the two Mayors will be subject to Parliamentary accountability arrangements.
Over changing governments, devolution has become a clear and embedded part of the rhythm of politics and fiscal events, with both major parties now consistently recognising the challenge posed by the UK’s centralised model. The new accountability process and departmental style spending for mayoral combined authorities will lead to a new dynamic between Mayors and central Government, and there was little detail on the next wave of devolution deals following the six negotiated since the Levelling Up White Paper. But it is clear that devolution is here to stay.
Analysis by: James Thompson, Lizi Hopkins and JP Spencer