Government / EAMA Updates – March 2023 Budget
24 Mar 2023
Budget March 2023 and Report from the Office of Budget Responsibility
Overview
Chancellor Jeremy Hunt produced a low-key, work-in-progress Budget on 15 March 2023, building on a modestly improved outlook from the Office for Budget Responsibility since last November. Hunt said his was a Budget for long-term, sustainable, healthy growth and to create a science and technology superpower. His four Budget pillars were Enterprise, Employment, Education and Everywhere.
Full expensing for IT, P&M
The main tax measure was to allow full expensing for IT, plant and machinery – 100% first-year capital allowance – for the next three years. It goes alongside the 25% headline rate of corporation tax announced by Rishi Sunak two years ago and now, finally taking effect. Full expensing sits alongside the annual investment allowance (AIA), already permanent at £1 million, and is an obvious successor to the super-deduction’s 130% allowance on the 19% tax rate that is now rising to 25%. Leasing is excluded. (The tax rate remains at 19% for profits of up to £50,000, with tapering between £50,000 and £250,000.)
Hunt said he would like to make the full expensing allowance, which is budgeted to cost £9 billion a year, permanent “as soon as we can responsibly do so”. Even at 25%, the headline rate of corporation tax remains the lowest in the G7, Hunt said. The point did not save him from scathing attacks from several Conservative backbenchers seeking more radical tax cuts, one of which noted that the UK rate is now double the main rate in Ireland.
The impact of allowances on when and whether a firm makes an investment has been much debated for decades. High rates of corporation tax with generous investment allowances encourage investment, it is argued, especially for firms based in and committed to the UK. It may not work so well when attracting investors from overseas that may wish to repatriate the profits. For future budgets, there is likely to be argument in favour of enhanced incentives around green and internationally competitive industry.
There are no tax allowances for training, an area of investment which HM Treasury views very differently from investment in products.
R&D Tax Credits
On R&D tax credits, the cuts from last autumn remain for most SMEs. Hunt announced an enhanced credit of £27 for every £100 spent – but firms must spend 40% or more of their total expenditure on R&D to qualify.
Domestic Energy Bills
There is a further three months’ support for domestic energy bills, saving an average of £160; but nothing new for business bills. Support for an extension of energy bill support beyond what had already been announced has sharply divided opinion among businesses, with many arguing that the government should concentrate on long-term energy cost competitiveness and security.
New Investment Zones
Emphasising science, technology and innovation, Hunt announced the intention to have 12 new Investment Zones. They will be bid for by West Midlands, Greater Manchester, the North-East, South Yorkshire, West Yorkshire, East Midlands, Teesside and Liverpool, plus at least one in each of Scotland, Wales and Northern Ireland. Bidders will show how they can “catalyse new innovation clusters” with universities or research institutes and will get up to £80 million for skills, infrastructure, and tax reliefs. “Advanced manufacturing” is one of the sectors that the government has cited as an example of what an IZ might focus on.
The absence of inclusion of the South-east of England, the UK region with the third-highest number of manufacturing jobs, and of East Anglia and the South-west is notable and seems inconsistent with Hunt’s “everywhere” pillar.
Employment and Skills
An important section of the Budget addressed “supply-side” employment issues, both relating to older workers and to those having to look after children. If the UK had the same ratio of over-50s working as Sweden, the UK would have one million more people in work, Hunt said. Pension tax changes benefiting high earners who remain in work will encourage doctors to stay on but also many other skilled and experienced people, Hunt said.
There is £40 million a year for what Hunt called “returnerships” – short training courses to help get over-50s back to work. The measure works initially through the sector-based work academies (that help to get the young unemployed into work, run through JobcentrePlus) and, from 2024, through skills bootcamps.
Hunt announced staged increases in childcare support to encourage more parents, especially women into work. The measures will cost £5.2 billion in 2026-27 and added an unusual, one might say Scandinavian, flavour to that part of the speech. It will be interesting to see the extent to which the changes affect behaviours. EAMA has been asked to gather opinion on the extent to which they will benefit firms the machinery and component supply chain.
There was startlingly little about skills. Nothing, for example, about the apprenticeship levy, where the Conservatives have seen Labour take the initiative in aligning themselves with policy requests from business; and nothing new on funding. With new impetus evident at both the business and education departments, with which EAMA is involved, we are likely to hear more on skills from the chancellor this autumn.
Financing
Hunt promised to bring forward a plan in the autumn for a “larger, more diverse financing system” that will “unlock productive investment” from pension funds; and a response to “the challenges created by the US Inflation Reduction Act”, which is attracting manufacturing investment to the US through grants and other incentives.
There was nothing in the Budget about export support, another area which may be subject for future announcements. The subject also dropped off the Integrated Review 2023, published on March 13th, having featured in the IR 2021.
Energy
Nuclear energy got a substantial boost by being declared “environmentally sustainable”, which puts it in the same category as renewables for incentives in the UK. Whether nuclear is a sustainable energy source is currently being hotly debated in the European Union, with France strongly in favour of nuclear and Austria a leading opponent.
One quarter of UK electricity will be from nuclear by 2050, Hunt said, and not only from large reactors. An international competition for development of small modular reactors (SMRs) was announced. Rolls-Royce is leading the UK in this new technology but there are others around the world, including GE Hitachi, which expects SMRs to be deployed in Japan in the 2040s (report, Financial Times).
In his autumn statement, Hunt had asked government chief scientific advisor Sir Patrick Vallance to report on what EU retained laws might be scrapped in five areas including “advanced manufacturing”. The first of those reports, on digital, was published with the Budget and its recommendations were accepted. The recommendations are high level and include calling for an “artificial intelligence sandpit”. The report doesn’t mention EU retained law. Vallance retires shortly and the work on advanced manufacturing will be led by his successor, biologist Angela McLean.
Brexit issues
Hunt referred to Brexit and the UK’s independence, a strong policy theme for Global Britain and a political necessity.
Pubs were helped by a duty change on draught beer that would not have been possible, had the UK still been in the EU. (The change was one of the few parts of the Budget welcomed by Nigel Farage.)
A notable absence from the Budget was any mention of Horizon Europe, the £100 billion EU research project in which the UK had been going to play a significant role until blocked by Brussels due to the dispute over the Northern Ireland Protocol. Horizon is not mentioned in the refreshed Integrated Review either. This is prompting uncertainty and fears that the PM may be unenthusiastic about large-scale UK engagement, for whatever reason – despite the fact that, if the Windsor Framework on the Protocol is approved by Parliament, the EU will almost certainly lift the block on UK involvement.
Hunt said there would be “competitive deregulation for high-growth sectors” and his announcement on medicines will be viewed with interest for pointers to policy in other policy areas, for example UKCA marking.
The MHRA (Medicines and Healthcare products Regulatory Agency), which hunt said is one of the most respected drugs regulators in the world, will change the way it works. “From 2024, they will move to a different model which will allow rapid, often near automatic sign-off for medicines and technologies already approved by trusted regulators in other parts of the world such as the United States, Europe or Japan.
“They [the MHRA] will set up a swift new approval process for the most cutting-edge medicines and devices to ensure the UK becomes a global centre for their development… They will put in place the quickest, simplest, regulatory approval in the world for companies seeking rapid market access,” Hunt said.
Other Budget measures:
- The 5p off fuel duty carries over for another year. FairFuelUK is one of the most effective public policy campaigns of the past 12 years. Together with measures on alcohol duty, the fuel duty measure is expected to reduce CPI inflation by 0.75% this year. Even the Liberal Democrats, a long-standing supporter of high fuel duties, supported the measure.
- An additional £230 million one-off payment to fix potholes. It is unclear that this will do what is required. The Local Government Association said last week under-funding of road maintenance would require £12 billion and ten years to recover.
- Local Enterprise Partnerships are to be defunded from April 2024 and greater powers given to local authorities, for which new funding packages were announced
- £11 billion over five years more for Defence, of which £5 billion over the next two years had already been announced.
Manufacturing
Ahead of the Budget, EAMA had asked Hunt to commit the government to expanding UK manufacturing. He didn’t do that, but he noted, in the context of UK growth potential and countering defeatism that “our advanced manufacturing industries produce around half the world’s large civil aircraft wings” but more is needed.
EAMA will be picking up on this enthusiasm for advanced manufacturing. We will be encouraging the government to develop much broader and stronger support for the manufacturing sector and suggesting ways in which that might be done.
Useful links:
Budget Index: https://www.gov.uk/government/publications/spring-budget-2023
Capital allowances: https://www.gov.uk/government/publications/full-expensing/spring-budget-2023-full-expensing
Vallance report on Digital: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1142883/Pro-innovation_Regulation_of_Technologies_Review_-_Digital_Technologies_report.pdf
EAMA’s pre-Budget submission: https://www.eama.info/downloads/EAMA_pre-Budget_submission_to_HM_Treasury_2023.pdf
Context – Office for Budget Responsibility report on economic and fiscal outlook
The economic and fiscal outlook has brightened since the forecast just four months ago in the wake of the disastrous Truss/Kwarteng emergency budget last autumn, according to the Office for Budget Responsibility.
GDP is predicted to fall by 0.2% in 2023, compared with 1.4% predicted four months ago. Growth in the years following is forecast at 1.8%, 2.5%, 2.1% and 1.9% in 2027. The UK [currently the only G7 country where GDP has not returned to its pre-pandemic level] is expected to get GDP back to its pre-pandemic peak in mid-2024, six months earlier than forecast four months ago due to stronger real wage growth and lower interest rate expectations.
“The near-term economic downturn is set to be shorter and shallower; medium-term output to be higher.” The chancellor has spent two-thirds of the improvement in the fiscal outlook on his Budget measures, leaving debt falling by only the narrowest of margins in five years’ time, the OBR said.
The Bank Rate will peak at 4¼% this year, rather than 5% assumed in November, it predicts.
CPI inflation peaked at 11.1% last October and will fall to 2.9% by the end of 2023. Inflation is falling marginally faster than had been predicted and deflation is no longer expected through 2025. Instead, the inflation rate is expected to flatline at zero for a year before slowly rising to 2% in 2028
“Despite more positive economic news since November, structural weaknesses remain,” OBR says:
- Business investment has stagnated since 2016
- Labour market participation has fallen dramatically, especially among older workers, leaving the total labour force 520,000 people smaller than expected prior to the pandemic.
- Productivity has grown at less than half its pre-financial crisis rate since 2010… “This reflects both the stagnation in business investment and weak growth in total factor productivity.”
Real household disposable income per person is expected to fall by a cumulative 5.7 per cent over the two financial years 2022-23 and 2023-24. This is 1.4 percentage points less than forecast in November but still the largest two-year fall since records began in 1956-57.
The OBR says that the full expensing policy for the next three years will bring forward investment that would have been made longer term and its prediction is that investment will be markedly less at the end of the three-year period. “A permanent measure would provide a sustained boost to investment, the capital stock, and productive capacity, though one that would come at considerable additional fiscal cost.”
Link: https://obr.uk/efo/economic-and-fiscal-outlook-march-2023/
Source: EAMA