Spring Budget 2023 - a view from the market

Macro-market impact

Financial markets barely moved over Chancellor Hunt’s speech: equities, bond yields and sterling all drifted – in sharp contrast to the reaction to Mr Kwarteng’s ill-starred ‘fiscal event’ last September. Perhaps that’s hardly surprising given the degree of trailing in the press in the days preceding the budget statement.

Similarly, the impact on the macro outlook, as seen by the OBR, is little changed from its November assessment:

GDP growth forecasts are about 1 percentage point higher this year compared to the November forecast but still negative 0.2% overall. The claims of "no recession" could imply that one or maybe two non-consecutive quarters are expected to be negative and the remaining quarters mildly positive but not enough in aggregate to offset the negative(s). Within that profile real household disposable income is forecast to be modestly higher compared to the November forecast, perhaps a reflection of the announced extension to the Energy Price Guarantee until end June.

CPI is expected to fall a bit faster but still flirts with deflation (negative numbers) in 2024 and 2025. That sounds good but can present a different set of challenges for policy makers.

Debt as a proportion of GDP is now forecast to be about 3 percentage points lower by 2025 but still almost 95%.

The tax burden (tax receipts as percentage of GDP) is expected to rise to 37.3% in 2025 – not least because of the increase in corporation tax but that was expected well beforehand and the new forecasts for the tax burden are hardly changed compared to the forecasts made in November. Given that the growth outlook is also not greatly different (see above) that suggests that behind the headlines has been a large amount of shuffling of deckchairs.

Standout features from a macro perspective

Perhaps the most significant announcement beneficial to the short-term outlook is the extension to the Energy Price Guarantee (EPG) at its existing level rather than the increase that had been scheduled. It is estimated to save average households some £160 over the period at a cost to the Treasury of around £3bn. Not big numbers but they help to lift the short-term forecasts for GDP and real household disposable income as noted above.

Longer-term are the announcements making childcare provision ultimately available for all under-5s, helping with the return to work for young working parents; abolishing the lifetime allowance on pension fund contributions, keeping people (particularly NHS doctors?) in work longer; the full and immediate expensing of capital investment for an initial three year period – to help kickstart the UK’s stalled productivity performance; the swifter regulatory approval process envisaged for MedTech; and the classification of nuclear energy as “environmentally sustainable” which opens the way to greater energy self-sufficiency.

Political context

A ‘poll-of-polls’ has had the governing Conservative Party trailing the main opposition Labour Party by some 20 percentage points (48% vs 28%) since the end of last year. Plugging those numbers into a model of the UK Parliament produces a significant majority for the Labour Party with a probability of almost 100%. But while those polls move relatively slowly, the betting markets move with greater speed and over the course of Chancellor Hunt’s Budget speech the implied probability of a Labour victory dropped from 66% to 60%. Still a mountain to climb for Prime Minister Sunak, but more like Annapurna than Everest.