2023 Budget – investing for future growth

The Chancellor painted a more optimistic picture of the UK economy in his Budget speech. In contrast to the recent gloomy prognosis from the International Monetary Fund, Jeremy Hunt said the UK economy would avoid a recession this year, and inflation would be below 3% by the end of 2023.

This echoes our view that inflation has peaked, with energy prices falling and supply chains opening up. Further interest rate rises are likely to be limited. However, it also demonstrates that investors will need to adjust to structurally higher inflation and interest rates, and they should not expect a reversion to the low interest rate environment of the past decade.

The latest insight into the UK economy may lead to a sigh of relief for many who were worried about the UK’s short-term prospects. However, a more important question is how the UK will generate self-sustaining growth in the future. The UK economy has been seen as slow-growing and sclerotic, resistant to any attempts to generate momentum.

The Chancellor acknowledged the problem, saying he would focus on boosting the labour supply, improving education, encouraging enterprise and ensuring that the benefits of economic growth were widely spread.

The Chancellor’s options are limited. While the UK’s debt to GDP ratio is set to fall, government finances are still under significant pressure. As such, any measures to support individual industries are by their nature, limited in scope. However, the Government has set its sights on a number of key industries to help galvanise growth in the UK economy.

The announcement included support for renewable energy. The Government announced £20 billion towards the development of a Carbon Capture Usage and Storage (CCUS) sector. Projects will begin on the East Coast to Merseyside to North Wales. The Chancellor said this would: “support up to 50,000 jobs, attract private sector investment and help capture 20-30 million tonnes of CO2 per year by 2030.”¹

More controversially, the Government announced plans to reclassify nuclear power as ‘green energy’, giving it access to the associated tax reliefs and co-funding companies to develop small nuclear reactors. He is also announcing the launch of Great British Nuclear, designed to bring down costs across the nuclear supply chain. The long-term aim is that nuclear should provide up to one quarter of the UK’s electricity by 2050.

Technology was also in the Chancellor’s sights: “harnessing British ingenuity to make us a science and technology superpower”. This ambition is popular with politicians but has seldom led to concerted action. Nevertheless, Hunt has outlined some specific measures. He plans to launch an AI ‘sandbox’ to trial new technology, helping entrepreneurs get products to market faster.

He has also ear-marked £900 million to develop super-computers in the UK, as recommended by the Future of Compute Review. The development of AI requires significant computing power to process and interpret data. He is also publishing a “quantum strategy”, setting out the Government’s vision to be a “world leading quantum enabled economy by 2033 with a research and innovation programme totalling £2.5 billion”. The Chancellor also cut corporation tax for technology and life sciences businesses.

There was also support for healthcare businesses and a commitment to raising defence spending. While these may not have an immediate effect, it does suggest a long-term direction of travel.

To foster growth in the economy, the Chancellor will also need to encourage investment. The change in the pension rules may bring a marginal benefit, with investors saving for retirement able to pursue a more growth-focused investment approach in their pensions now that the lifetime allowance has been removed.

In December, the Chancellor promised an overhaul of the banking rules – the so-called ‘Edinburgh Reforms’. In addition to changes to banking rules, he also promised reform of the UK prospectus regime to support stock market listings and capital raises². While this is a long-term project, it may ease some of the impediments to investment in the UK and may help encourage entrepreneurship.

Ultimately, none of these measures are likely to move the dial for the UK economy on their own.  The test will be whether they can encourage a change of mindset in British business. In the long term, this will be crucial in regenerating the UK’s economy.

Sources:

¹ https://www.ft.com/content/7f0b0e04-0432-4499-aed6-193bd0770ea9ur

² https://uk.finance.yahoo.com/news/chancellor-cuts-red-tape-axes-081045912.html