Markets

Here's what the UK Spring Statement means for companies and markets

Our economists take a closer look at what was contained in the UK Spring Statement and share key takeaways for corporate decision-makers and investors.

It’s not all doom and gloom. The OBR expects business investment to grow rapidly – at a healthy 10% clip this year The unemployment rate is now forecast to trough in Q1 2022 at 3.9%, a whole percentage point lower than what was expected in October and back to the pre-pandemic lows. As for economic growth, the OBR’s forecasts beyond 2022 are significantly more optimistic than our expectations (and almost twice as high as the Bank of England projections in 2023 & 2024).

Still, uncertainty clouds the outlook. The full impact of the invasion of Ukraine – especially at the fuel pump – hasn’t’ been fully factored into the outlook. Labour markets remain tight, which could put more upward pressure on prices. Any steeping of inflation, and therefore interest rates, could pose a threat to the state of public finances and business sentiment.

It’s against that backdrop that the Chancellor’s Spring Budget was revealed, and here are some of the key takeaways for corporate decision-makers and investors.

Some help at the pump with a fuel duty cut

As broadly expected, the UK government announced a fuel duty cut of 5p a litre, which will start immediately and last until 23 March 2023.

This follows similar moves by other national governments in recent weeks, including France and Ireland, and will certainly be welcome news for households as well as companies – who have seen prices jump by some 25p per litre over the past month.

National Insurance changes could lure back workers and cut contribution costs

In the run-up to the Spring Budget, there had been calls from all sides for the Chancellor to delay the rise in National Insurance Contributions (NIC) announced last Autumn. Alas, there was no such U-turn. Instead, we got a substantial rise (£3000) in the threshold for NI contributions, which will now kick in at the same level as income tax.

The plus point for businesses – especially those in retail and hospitality sectors – is that the policy just might help them draw back a few workers into the labour force who had left over the past two years, or at the very least delay the departure of some, helping fill the record-level of vacancies.

Other changes to NICs will help. The Employment Allowance is being raised from £4k to £5k, which will take some 50k businesses out of paying NICs and the Health & Social Care Levy.

A welcome boost for the transition to net-zero: incentives for renewables and energy efficiency

Businesses looking to invest in renewable energy or energy efficiency were treated to new incentives. There will be no business rates due on a range of green technologies used to decarbonise buildings, including solar panels and batteries. The measure (which complements similar tax incentives for households) could provide a small uplift for energy equipment manufacturers at a time when conventional power prices are reaching record heights.

Keeping some powder dry for the autumn: investing in 'capital and ideas'

There’s rarely a Budget or Spring Statement that goes by without reference to the UK’s age-old problem of under-investment: Private investment in the US is around one quarter higher today than it was in 2016 but in the UK, it’s remained virtually unchanged since.

To that end, the Chancellor trailered plans to be set out in the autumn that help businesses invest more in productivity-boosting activities, including research and development tax relief reforms that deliver better value for money and stretch to cover for a wider range of areas including data, cloud computing, and pure maths.

Lower-than-expected public sector borrowing – but the outlook for gilts is nuanced

All told, the targeted support measures contained in the Spring Statement total roughly £8.3 billion (0.3% of GDP), but over the next five years will amount to an average fiscal tightening equal to just 0.1% of GDP. As far as the deficit (and the effort to reduce it) is concerned, that’s no macroeconomic gamechanger.

Despite a (modest) rise in spending, forecast public sector borrowing over the coming fiscal year looks set to be even lower than our tapered estimates going into the Spring Statement, with the OBR forecasting gilt issuance in the region of £124.7 billion in 2022-23 vs our figure of £157.7 billion. This is down largely to a combination a larger-than-expected tax haul and the "carry over" of £49.1 billion of overfunding in 2021-22. Higher tax receipts also look set to drive lower-than-expected borrowing in the years to come, but if the past two years have taught us anything, it’s that nothing’s for certain.

For markets, the 2022 Spring Statement is supportive for gilts near term, given lower-than-expected issuance volumes. Longer-term, however, the outlook is less certain. Changes in composition to of gilt issuance – mainly, more T-bills and short-term notes and significantly less medium-term notes – still show a sizeable supply of longer-duration gilts for the market to absorb when compared to 2021, as the Bank of England pulls back on asset purchases in the months ahead. That the Debt Management Office (DMO) doesn’t plan on reducing the proportion of inflation-linked debt is also likely negative for gilts.

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