All eyes on the cost of living: our top 5 predictions for the UK Spring Budget

Our economists share their top predictions for what we’ll see (and won’t see) in the UK Spring Budget 23 March, and key takeaways for companies, investors, and markets.

The cost of living has spiralled out of control in recent weeks, ratcheting up pressure on businesses to increase wages – and on the government to provide additional economic support. Those cost pressures have been exacerbated by Russia’s invasion of Ukraine, pushing the cost of energy and other commodities to heights not seen since the 1970s.

All of this puts pressure on the Bank of England to continue hiking interest rates. It also means that striking a balance between fiscal discipline and investment won’t be any easier than it was in October 2021. Rising inflation does lead to more tax income for HM Treasury, but higher interest rates and more expensive government borrowing may constrain the government’s ability to materially offset rapidly rising living costs. Still, we think the Chancellor will introduce some targeted measures that could help the most vulnerable and support businesses at a time when costs are rising rapidly.

Here are our top 5 predictions for the UK Spring Budget 2022 and key takeaways for companies, investors, and markets.

Easing pressure at the pump with a fuel duty cut

The price of petrol has clearly skyrocketed since Russia’s invasion of Ukraine, weighing heavily on families and on businesses, especially those that operate large fleets of vehicles, while the impact on supply chains has been broadly inflationary. All of this has heaped pressure on the UK government to follow others like Germany, France, and Ireland with a sizeable cut to the fuel duty – which we think is likely to feature.

The motivations for such a move are not really economic; in fact, higher petrol prices translate into a larger tax haul that could then be redistributed as support elsewhere. But from a PR and political perspective, it would garner support from families and businesses, and help drown out negative press associated with less popular changes to which the government’s commitment has been steadfast – such as the 1.25% increase in National Insurance contributions that come into effect next year.

Higher prices will hurt consumption and corporate investment, weighing on economic growth

The UK economy showed its resilience at the turn of the year when the Omicron variant was surging and governments re-imposed social distancing rules – and it bounced back dramatically in January. But while we think the UK economy ended 2021 on a stronger footing than even the government anticipated (7.5% rise in economic output in 2021 vs. 6.5% forecast by the government last October), we expect inflation to dent official economic growth expectations as higher costs curb household consumption and make businesses more defensive about investing in growth.

We think the government will trim the economic growth forecast it set out in October, from a 6.0% rise in gross domestic product (GDP) in 2022 to 4.3%, and from 2.1% to 1.4% for 2023.

Blunting the sharp rise in corporations tax

Corporations tax is set to rise from 19% to 25% from 2023, but recognising the impact that such a sharp rise could have on growth (at a time when inflation is looking higher and stickier) and facing tremendous pressure from the business community, the Treasury may look to tweak the tax system so as to blunt the negative impact of that rise.

This could come in the form of a staggered tax rate rise; for instance, delaying the 25% rise by a year and splitting one big rate rise into two smaller ones. Or it may include incentives to encourage corporate investment.

Although political pressure is mounting to offer businesses some relief, we think financial support is likelier to be targeted and temporary, largely because inflationary pressures on public sector’s wage bill and the rising cost of government debt (much of which is indexed to the rate of inflation) reduce much of the headroom additional tax income would have generated.

Lower government borrowing – but not as much as markets think

The October 2021 Budget brought substantial downward revisions to government borrowing: for the 2021-22 fiscal year, the Central Government Net Cash Requirement (CGNCR) – the borrowing aggregate which forms the basis for gilt issuance – was lowered by £83 billion to £158 billion (to 7.2% of GDP from 10.9%). Public finances data since have shown even greater reductions as higher-than-expected tax revenues reduce the government’s reliance on borrowing, and we now think CGNCR will sit some £30 billion below the Office for Budget Responsibility’s October forecasts.

Yet as we alluded to earlier, that sizeable undershoot looks set to disappear as quickly as it came about as higher inflation forces unforeseen government spending to support households and businesses, higher public sector wages, and a sharp rise in debt-servicing costs. Index-linked bonds account for around £497 billion of the £2.02 trillion gilt stock, and the Institute for Fiscal Studies reckons inflation could add some £11 billion in interest payments for this coming fiscal year alone.

What does all this mean for markets? We’d caution against over-estimating a drop in gilt supply, while some quantitative tightening will add bearish pressure to bonds. From a supply perspective, given the inflationary environment, we naturally expect the Debt Management Office to pull back on issuing inflation-linked gilts so that its debt doesn’t become more costly to service. Finally, we think the government will continue building out the UK’s green bond curve and we are pencilling in some £15-20 billion in green gilt issuance – including a new 20-year note. A number of the key policies and investment plans outlined in the UK’s net zero strategy are fully aligned to the Green Gilt Framework, which provides significant scope for new green issuance in the coming year.

Keeping some of the fiscal powder dry for the Autumn

We don’t expect substantial financial support for businesses to be announced during the Spring Statement. But we think the introduction of targeted and temporary measures mean the government can recycle much of the fiscal headroom generated by stronger-than-expected tax receipts into greater support for more vulnerable pockets of society and for businesses most heavily affected by the cost-of-living crisis.

This also buys the government time. With a full Budget scheduled for the autumn, the government will be in a better position to assess the impact of the measures – and create more room for prices to stabilise – before considering a larger fiscal support package.


Richard Ramsey, Chief Economist, Northern Ireland, Ulster Bank

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