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Spring Budget 2023: still in search of a long-term plan?

Spring Budget 2023: still in search of a long-term plan?

Ciaran Gunne-Jones & Edward Clarke 15 Mar 2023
Today’s Spring Budget was, very deliberately, intended to be a fairly quiet affair (to the frustration of some Conservative MPs). In Whitehall circles it was already being referred to as the ‘placeholder’ budget – coming in the aftermath of last Autumn’s disastrous mini-Budget which left limited fiscal bandwidth for major new spending decisions, and preceding an Autumn Budget when the Chancellor might be hoping that conditions will have improved sufficiently to allow some pre-election good news announcements.
The Chancellor’s preparations had been prefaced by some brighter economic news, namely that 1) a recession has (so far) been avoided and the latest Office for Budget Responsibility (OBR) forecast indicates this will continue to be the case for 2023 as a whole, and, 2) the UK government deficit this year proving to be smaller than was originally expected. Jeremy Hunt seized on this news early in his speech to say the economy was “proving the doubters wrong”.
However, some perspective is needed on both these points. First, in the three months to January, the UK’s monthly GDP figures were +0.15%, -0.55% and +0.28% respectively according to the Office for National Statistics (ONS) – technically avoiding a recession, but the statistical equivalent of not much happening – and the OBR forecast for 2023 still shows the economy shrinking by -0.2% this year (albeit a big upgrade from -1.4% in last November’s forecast) just not necessarily within two consecutive quarters. The OBR then expects GDP growth to pick up to 1.8% in 2024 and 2.5% in 2025 as interest rates start to fall and drops in energy and other prices take inflation below the 2% target, but it has also slightly downgraded the mid-term growth figures for 2025, 2026 and 2027.
Second, while the OBR estimates the budget deficit this year to be £25 billion lower than expected, this is due to a somewhat temporary mix of higher tax receipts and lower spending (mainly reflecting the lower international gas prices and consequent reduced cost of the energy price guarantee scheme). The Chancellor has opted to use about two-thirds of this ‘gain’ to finance the Budget headline measures announced today – namely providing more support with energy bills and business investment, and measures to boost the labour supply. The effect of these will be to see borrowing levels increase again in overall terms mainly during the next three years, but meanwhile making few inroads to reducing government debt levels as a proportion of GDP.
Taken together, there was – perhaps unsurprisingly – a sense of incremental measures to address some of the main short term challenges where the public finances will allow for it, but few expansive interventions or any real sense of a comprehensive long-term plan. Business groups which have been calling for some form of game-changing stimulus measures to level up the UK with what’s being offered by the Inflation Reduction Act in the US or the EU’s Green Industrial Deal Plan, will be left disappointed. However, the full expensing capital allowance for 2023-26 will be welcomed as a means to incentivise firms to bring forward investment and thereby giving a much-needed boost to the level of business investment in the next few years.
Beyond these national measures, the Chancellor was keen to remind us about the government’s commitment to levelling up and promoting local growth and there were some important announcements in this regard.
First, and after much speculation, the government is calling time on the network of Local Enterprise Partnerships (LEPs) that were first introduced in 2011. LEPs have arguably been on borrowed time since the government's LEP Review concluded in March 2022, and government now intends to consult on withdrawing their funding and transferring responsibilities to local government from April 2024. The premise is that putting local economic development policy in the hands of democratically-elected local leaders will mean they can act more flexibly and innovatively, responding to local needs and driving growth for their citizens. That may be all well intended, but the reality is that the resources and budgets available to many local authority economic development teams have been significantly scaled back during the past decade, so significant investment will be required to rebuild capacity. In this context, a third round of the Levelling Up Fund will proceed as planned later in 2023 with a further £1 billion being made available. Alongside this, 20 new ‘Levelling Up Partnerships’ to be created in areas[1] most in need of levelling up will provide over £400 million of investment for "bespoke place-based regeneration" running until March 2025. Apportionment of this investment will be made on a case-by-case basis.
Second, Liz Truss’ ill-fated Investment Zones policy makes a return – even if in name only. While originally ‘hundreds’ of zones were envisaged, today’s Budget confirmed just 12 locations including 4 across Scotland, Wales and Northern Ireland will now be subject to detailed appraisal for new Zones, with a “refocused” policy on productivity, universities and key growth sectors. These will have access to a single 5-year tax offer (matching that in Freeports), consisting of enhanced rates of Capital Allowance, Structures and Buildings Allowance, and relief from Stamp Duty Land Tax, Business Rates and Employer National Insurance Contributions – but notably no mention this time of special planning powers or additional flexibilities. Local partners will be able to choose the number and size of tax sites, within a £80 million envelope, up to a maximum of 3 sites totalling no more than 600 hectares. The locations in England are within the proposed East Midlands Mayoral Combined County Authority, Greater Manchester, Liverpool City Region, the proposed North East Mayoral Combined Authority, South Yorkshire, Tees Valley, West Midlands and West Yorkshire.
Third, the Budget confirmed further support to ensure ‘nutrient neutrality’ obligations can be efficiently delivered, thereby reducing the risks facing developers building homes in affected areas. DLUHC will shortly launch a call for evidence from local planning authorities, backed by a commitment to provide funding for high quality, locally-led nutrient mitigation schemes. Where high quality proposals are identified, government has indicated that it will provide funding to support clearer routes for housing developers to deliver ‘nutrient neutral’ sites using ‘credits’. Given the challenges this issue has already created in terms of housing delivery across large parts of the country – see for example our earlier analysis on the five-year housing land supply and economic growth implications – definitive solutions can’t come soon enough for the housebuilding industry.
Finally, and on the subject of housing, the OBR forecast shows house prices are forecast to fall (largely driven by higher mortgage rates) and not recover to current levels until 2027/28. This is consistent with the latest indicators from Halifax and Nationwide house price indices which show prices already starting to fall.

Source: OBR (2023) / Lichfields analysis

The OBR also expects house building levels to fall, in contrast with the pre-Covid trend growth, the 2026/27 rate is set to be 8% lower than 2022/23 and 18% lower than pre-Covid in 2019/20. The average rate for 2023/24 – 2027/28 is forecast to be 239,700 net additional dwellings a year.

Source: OBR (2023) / Lichfields analysis

Image credit: @hmtreasury via Twitter

[1] Local areas to be invited to form partnerships include: City of Kingston upon Hull, Sandwell, Mansfield, Middlesbrough, Blackburn with Darwen, Hastings, Torbay, Tendring, Stoke-on-Trent, Boston, Redcar and Cleveland, Wakefield, Oldham, Rother, Torridge, Walsall, Doncaster, South Tyneside, Rochdale, and Bassetlaw.

 

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Autumn Statement 2022: A very different fiscal statement
Another year of crises and turbulence has left us once again with yet another new Chancellor delivering a fiscal statement in ‘unprecedented’ times. The inter-related challenges of the war in Ukraine, COVID recovery, supply side inflationary shocks and concerned market analysts leave the country facing ‘eye wateringly difficult’ decisions to tackle inflation, restore stability and get debt falling.
 
So less than eight weeks since Kwasi Kwarteng delivered the now infamous “mini-Budget” which stood out as the largest tax-cutting budget for 50 years, his successor Jeremy Hunt pivoted sharply to measures that will mean the highest tax burden in the UK’s post-war history by 2027-28 – equivalent to some 37% of total GDP.
 
After the fallout from the mini-budget, the markets, the Bank of England (BoE), and now the OBR have all had their say: any talk of fiscal headroom has vanished. Far from the boosterism of previous statements, this government’s priorities are now stability, growth and public services.
   
 

Return to the orthodoxy

To reassure markets after recent turmoil, we were left in no doubt that the Office for Budget Responsibility (OBR) are back in the centre of things, having been essentially ignored by Kwarteng. Their independent forecasts for the economy and the public finances arguably now have more weight than at any point in the OBR’s 12 years of existence.
 
The OBR forecasts are similarly pessimistic in the near term to the Bank of England (BoE) (announced earlier this month), with a 1.4% decrease in GDP forecast for 2023 (1.5% BoE) but are more optimistic that this will not be the long recession forecast by the Bank of England, rebounding to growth of 1.3% in 2024 (-1% BoE 2024) and 2.6% in 2025. Even in this scenario, the OBR forecast that the ‘output gap’ will not see the economy recover to potential output levels until mid 2027 (i.e. when energy prices and inflation are set to drop) assuming that monetary policy responds to the fiscal tightening with equivalent easing.
 
Comparison of forecasts for real GDP growth

Source: OBR, November 2022 Economic and fiscal outlook 

Much of the difference can be attributed to the policy measures announced, that the OBR have been privy to in arriving at their forecasts. The reaction of the Bank of England will at least in part tell us whether the fiscal and monetary policies are in lock step.
 
Similarly, historically sluggish business investment, already the focus of the Prime Minister’s Budget last year when Chancellor, is 8% lower than pre pandemic levels and set to stay lower until Q3 2025.
  
Business Investment levels

Source: OBR, November 2022 Economic and fiscal outlook 

The Chancellor has been clear that addressing the ‘fiscal black hole’ means that all spending decisions have to add up to the forecasts which will really put the OBR in control. Therefore in a marked reversal from the last fiscal event there were no ambitious supply side reforms or investments, although planning reform remains part of the agenda with announcements to follow.
 
 

Funding for local Government

The Autumn Statement confirms that departmental budgets will be maintained at least in line with the budgets set at last year’s Spending Review, albeit inflation is eroding these in real terms. Under the previous period of austerity, local government funding saw a disproportionately high proportion of the overall cuts. According to Centre for Cities analysis, local government in England saw its budget cut by more than half between its peak in 2009/10 and 2015/16 and the Institute for Fiscal studies analysis of the Autumn Statement make clear that the cuts of the 2010’s will not be undone for the Department for Levelling Up Housing and Communities (labelled as Housing and Communities in the chart below).
 

Source: IFS Analysis of Autumn Statement, 2022

 
Local authorities – some of which are claiming they are close to bankruptcy including Kent and Hampshire – will therefore likely welcome the additional flexibility granted by the Chancellor to raise Council taxes, providing some of the fiscal devolution that local areas have asked for. However social care will consume much of this. The Chancellor has allowed Council tax to be increased by up to 5% including a 2% social care precept.
 
 

Levelling up

Levelling up appears to be back, but under the austere spending expectations there were no ‘rabbits out the hat’. The second tranche of the Levelling Up Fund will be £1.7 billion – similar to the first tranche.
 
New and confirmed devolution deals for Cornwall, Suffolk, Norfolk, and the North East (which is awaiting confirmation of its constituents as to the inclusion of Durham) were announced.
 
Devolution was also mentioned as a driver of growth. In particular, the trailblazer deals for Greater Manchester and the West Midlands, with the potential for ‘departmental-style’ settlements at the next spending review with the suggestion that this is a move away from the much maligned competitive bidding processes.
 
The proposed Investment Zones – one of the flagship proposals in the mini budget – have largely been watered down and will be ‘refocused’ around universities but there will be no tax reliefs or budgets associated with them. The existing expressions of interest from local authorities will not be taken forward which will no doubt leave many frustrated.
 
The government has also scrapped the list of infrastructure projects that were flagged for acceleration in the Growth Plan but there was a return to more of the priorities of the levelling up era. The Chancellor recommitted to HS2, Northern Powerhouse Rail and East West Rail investments.
 
There was notably no mention of the Shared Prosperity Fund, which poses some technical questions about the ability for local areas to spend the expected £400m fund which was to replace EU funds.
 
  

Housing and planning

The Autumn Statement offered little by way of specific measures on housing and planning, so industry minds will instead be focused on the upcoming planning reforms – likely being re-drafted given the changing priorities of the day, the return of Michael Gove to his former brief, and the levelling up and regeneration bill currently passing through the House.
 
The exception was the stamp duty cuts which are now scheduled to continue to April 2025, when they will be tapered. Despite this measure, the OBR house price forecasts are somewhat stark – with prices not forecast to return to current levels until 2027, this is likely due to the overwhelming effect of mortgage costs outweighing any fiscal benefits from the stamp duty relief.
  
House Price and Mortgage rates

Source: OBR, November 2022 Economic and fiscal outlook 

Away from the Autumn Statement, the Secretary of State has restated his commitment to the manifesto pledge of delivering 300,ooo homes a year. Building ‘beautiful’ homes has been retained as a priority, and as a way to achieve local support for house building. Howeverwith less funding and dwindling parliamentary time meeting this target will become increasingly difficult to achieve with the OBR forecasting that net additions to fall from current levels (NB this is for the UK not England).
 
Net additions to the housing stock, UK

Source: OBR, November 2022 Economic and fiscal outlook 

 

Conclusions

The Chancellor’s priorities from the Autumn Statement were clear.
 
Top of the list was to provide stability, and the initial market response suggests the Chancellor has delivered on this. Many of the measures and the gloomy economic forecasts were expected, and the tax rises and spending constraint marks a significant – albeit well trailed – about turn from the ‘boosterism’ of the previous Prime Ministers.
 
In the medium to longer term, the Chancellor has acknowledged that growth will be key, it is encouraging that the Chancellor has maintained that levelling up will be part of this: more devolution deals, and further deepening of devolved funding to Manchester and the West Midlands as pilots. However without any real accompanying incentives of more funding and new infrastructure, the economic and political reality of how this growth conundrum will be achieved remains to be seen.
 
Maintaining and improving public services in a recessionary period will be difficult, and it is with trepidation that we await the funding agreements for local government already tasked with the overwhelming challenges of adult social care. The tight spending plans from 2025 onwards imply annual cuts for some budgets of 0.7% per year; for local government this is on top of a long period of ‘efficiency savings’ and could result in even more over-stretched services.
 
With Government and business investment at a minimum attention within the built environment sector now turns to the Secretary of State to see how planning reforms could contribute to the supply side boost that the economy so clearly needs, but acutely aware there will be less public money available to support it. The need to incentivise and provide a clear pathway for private sector investment has never been greater.
  
  

Disclaimer

This publication has been written in general terms and cannot be relied on to cover specific situations. We recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Lichfields accepts no duty of care or liability for any loss occasioned to any person acting or refraining from acting as a result of any material in this publication. Lichfields is the trading name of Nathaniel Lichfield & Partners Limited. Registered in England, no.2778116

 
Image credit: Aswin Mahesh
 

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