Why Britain’s spring budget won’t solve the economy’s woes

London(CNN) UK financial markets were spooked again on Wednesday – although unlike last autumn the turmoil had nothing to do with a new government budget aimed at reversing Britain’s economic decline.

UK Treasury Secretary Jeremy Hunt was careful to avoid the drama that engulfed his predecessor’s “mini” budget in September when he presented new spending and tax plans on Wednesday. But as a crash in CreditSuisse (CS) Stocks reignited fears sparked by the collapse of Silicon Valley Bank, which last week FTSE100 (UKX) fell and the pound fell against the US dollar.

Fortunately for Hunt, the economic picture has improved somewhat since he scrapped most of former Chancellor Kwasi Kwarteng’s disastrous plans for debt-fueled tax cuts and spending sprees. Falling natural gas prices have eased inflation while boosting public finances, which are strained by household energy subsidies.

The Office for Budget Responsibility (OBR), the government’s budget watchdog, now expects the UK economy to contract by just 0.2% in 2023, compared with the 1.4% contraction forecast in November.

Quiet, the UK is the only major economy forecast by the International Monetary Fund to contract this year; inflation continues to erode wages and exacerbate a long-standing decline in living standards; supply chains remain fragile; and the country is experiencing its worst wave of strikes in 30 years.

Financial market turmoil could exacerbate the situation if UK banks respond by reducing lending to households and businesses, weighing on consumer demand and investment spending.

Britain’s Chancellor of the Exchequer Jeremy Hunt outside Downing Street in London, Britain, November 17, 2022.

More than 133,000 officers was due go on Wednesday on pay, pensions and job security, followed by teachers, transport workers, young doctors and some BBC journalists.

Some economists thought Hunt could raise public sector salaries to end the ongoing strikes. But he only mentioned “industrial action” in passing, even though the economy lost nearly 2.5 million workdays to strikes between June and December.

However, Hunt pledged to extend government support for energy bills and maintain a £2,500 ($3,037) cap on annual bills until the end of June, which will save the average family £160 ($193).

He also presented plans to boost corporate investment and increase the workforce. These measures “should be growth-promoting,” said the chief economic advisor of the EY ITEM Club, Martin Beck. “Although they will pull the UK out of a long period of slow expansion seems questionable.”

tackle Britain’s growth problem

Despite a long list of challenges facing the UK economy – from Brexit and labor shortages to striking workers and a crumbling public health system – Hunt declined the “narrative of decline”.

“During the fall we made tough decisions to deliver stability and solid money. Today we are delivering the next part of our plan: a budget for growth,” he said.

“Not just growth out of a downturn. But long-term, sustainable, healthy growth…all while making our country one of the most prosperous in the world.”

Britain is the only G7 economy not yet to regain its pre-pandemic size, and a lack of investment is partly to blame.

As part of his bid to balance the books, Hunt stuck by his plans to raise corporate tax from 19% to 25% in April, noting that the UK would still have the lowest key rate in the G7.

But to spur growth and address low business investment, Hunt unveiled tax breaks that allow companies to offset every pound invested in equipment, plant and machinery against taxable profits over the next three years. The OBR expects this to increase business investment by 3% for each year it takes place.

Free childcare to alleviate labor shortages

The labor shortage is also a huge obstacle to the economy growth, and Hunt announced a series of measures to help parents, pensioners and people with disabilities or ill health back to work.

There are currently more than 1 million job vacancies in the UK economy, some 300,000 more than before the pandemic, and 21% of the labor force are “economically inactive” according to the Office for National Statistics, meaning they are unemployed and not looking for work .

Besides Brexit, Early retirement and sickness are important factors. About 3.5 million people between the ages of 50 and 65 are not part of the labor force, according to Hunt.

In one of the biggest budget gifts, Hunt introduced 30 hours of free weekly childcare for children over nine months, to be phased in from April 2024 to September 2025. The Chancellor said the measure would cut childcare costs by 60% and bring savings Families £6,500 ($7,800) per year.

To encourage people over 50 to extend their careers, Hunt increased the annual tax-free pension contribution supplement by 50% to £60,000 ($72,360) and scrapped the “lifetime allowance” that penalized workers with larger pension savings, which was cited by some doctors as a reason for early retirement.

The SVB could squeeze UK bank lending

While the outlook for the UK economy looks brighter than in the autumn, the sudden collapse of the Silicon Valley bank could weigh on growth in the short term.

Troubles in the US banking sector represent “a new source of uncertainty” and “an unexpected caution may need to be exercised in the OBR’s less pessimistic forecasts,” Beck of the EY ITEM Club said in a statement on Wednesday.

The collapse of the SVB continued to reverberate through global financial markets on Wednesday Bank stocks, including in the UK, where financial services still dominate the economy.

Although the sell-off is unlikely to result in a broader banking crisis, it will make lenders more cautious, which Berenberg said could have a significant impact Senior Economist Kallum Pickering.

“It is likely that UK financial conditions will remain tighter (or potentially significantly tighter) in the coming months than they would have been without the US bank woes,” Pickering said in a research note on Monday. “All other same tightening financial conditions will weigh on consumer demand and reduce the availability of credit for capital spending.”

If banks rerate or reduce lending, it could make the UK recession “a touch bigger” than the 1% contraction Capital Economics expects this year, said the firm’s UK chief economist Paul Dales.

“But at the moment it doesn’t look like a repeat of the global financial crisis is imminent, during which Britain’s real GDP fell by 6%,” he added.

Leave a Reply

Your email address will not be published. Required fields are marked *