Budget 2023: Our Chief Economist Reaction

Ahead of the Spring Budget the UK economy was still 0.8% smaller than its pre-COVID level. This contrasts to the United States and Eurozone economies that were 5.1% and 2.4% larger than pre-pandemic. This unfavorable international comparison framed all the financial decisions that Chancellor, Jeremy Hunt, made in his statement. From smaller tax revenues to fund public services and levelling up, to reduced scope for tax cuts and investment. This was the Budget when the fightback against stagnating UK growth began in earnest. Attempts last autumn by Liz Truss and Kwasi Kwarteng at the infamous “Mini-Budget” ran into the punch provided by sceptical financial markets. This time around similar initiatives were greeted rather more keenly thanks to a welcome return to evidence-based policymaking. Policy favoured by focus group and by soundbite took a back seat for a change. Political strategists will judge whether Hunt and his boss, Prime Minister Rishi Sunak, get any credit from the electorate at the next General Election. However, from the perspective of investors looking to allocate to the UK – and businesses operating in the UK – the Budget struck a reassuring tone. Putting aside changes to incentives for businesses to invest – and a three-year commitment to full expensing worth more than £27bn is indeed a welcome incentive – the relatively dull, technocratic delivery was just what was required in what was the third UK Budget in six months.

In many ways there was little choice left for the Chancellor. Having relied on the falling cost of debt for more than a decade and then having the option of unfunded tax cuts undermined last September, growing the effective size of the UK workforce became the unavoidable focus of Treasury attempts to get the UK economy match fit for the challenges to come. Overweight and undertrained is no way to face the dash to Net Zero, arm wrestles with Russia and China, and to keep pace with the demands of an ageing domestic population. This sluggishness can be measured by the fact that more than nine million Britons aged 16-64 are currently out of work and not actively seeking work. This is more than half a million higher than its equivalent level before the COVID-19 pandemic. No G7 country has seen a loss of productive capacity on this scale. This is a colossal waste of talent and opportunity. Whilst getting rail lines, broadband, houses and nuclear power stations built have a lag, and considerable planning barriers – finding effective ways to support carers, older workers and the long-term sick get back into work is the shortest path to generating higher economic growth.

Now it is fair to point out that the measures announced in the Budget – including reforms to pension savings rules, free childcare and employment support – are very costly. The overall package of measures looks set to cost more than seven billion pounds a year by 2027/28. This is equivalent to the entire environment, food and rural affairs budget.

Furthermore, the government’s own watchdog, the Office for Budget Responsibility, believe that this will only get a further 110,000 Britons back to work. This equates to a cost of almost £65,000/year per additional job. This is an entirely valid challenge, and this type of analysis is exactly where the value lies in the government’s plans being scrutinized. The Chancellor must have been sorely tempted to limit childcare and pensions reforms to lower and middle-income households. That will be the likely attack line from the opposition Labour Party. But there is also evidence – that the Treasury will be aware of – that the Office for Budget Responsibility have been regularly too pessimistic on employment over the last decade. They may be being so again.

These concerns aside, can the UK economy really afford to allow a group of nine million inactive people to stagnate out of the workforce. Brexit and the COVID-19 pandemic have both damaged the capacity of the UK economy to pay its way in the world and grow living standards. This was the case even before the war in Ukraine. Growth really is the only sustainable way to lean in against these damaging impacts. The good news is that if large numbers of Britons do come back to seeking work there is still plenty of demand from employers. The Office for National Statistics reported earlier this week that there remains a very high level of vacancies at 1.1 million. Order books remain remarkably resilient for an economy that no longer looks set to enter recession. Events in the banking sector may yet derail this encouraging economic backdrop but, as with so many factors effecting the UK economy, these are largely outside her direct control. Getting the right environment for a high employment economy is not. For that reason alone, it is worth the considerable effort and large cost.

Author: Simon French, Chief Economist and Head of Research, Panmure Gordon

Simon French

Managing Director, Head of Research