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TLDR: Things might a little less glum than many had feared as the economy is proving a bit more resilient and energy prices have come down, but don’t expect many fireworks or giveaways from Chairman Hunt.

Context: Last September’s mini-Budget fiasco led to Jeremy Hunt being installed as Chancellor, a palace coup that placed Rishi Sunak in Number 10, and the November 2022 Autumn Statement. Chairman Hunt has lots to do, but the step away from the fiscal abandon of Trussonomics means the Budget on March 15th is likely to be a rather stuffy affair.  There has been some more encouraging news since November, particularly on borrowing and tax receipts, but the Chancellor will not consider short-term relief as reason to open the purse strings.

Resilient: We note for instance the construction sector rebounded in Feb as fears of a recession faded. The S&P Global/CIPS UK Construction Purchasing Managers’ Index (PMI), jumped to 54.6 in February, up from 48.4 in January. But not thanks to housebuilding, which fell for a third month in a row. Consumer spending has been ok, and it looks as though the UK avoided a recession in the final quarter of last year. OBR forecasts are likely to be bit rosier than they were at the time of the Autumn Statement and borrowing will be lower than previously forecast.

It looks as though the Chancellor can hail the public finances being in much better condition than he or the OBR figured they would be in November. Lower energy costs are a big factor, reducing the cost to the government of the Energy Price Guarantee.  Households have kept spending and tax takes have been good. Lower market-based interest rates have also helped to cap mortgage costs – albeit the full effect of this on household finances will only be felt as 1m+ fixes come due in the coming months.

Bond vigilantes: Gilt yields have moved back up in recent months following the mini-Budget spike. Largely we can trace the UK yield alongside international peers amid a global selloff in bonds in February. However, as the mini-Budget revealed, bond vigilantes cannot be discounted entirely – albeit the trauma in the gilt market was in large part thanks to LDI market mechanics that have subsequently been sorted.

Given the Chancellor’s fiscal conservatism, I see limited risk of any serious reaction in gilts. Lower expected borrowing will be a positive for gilts, and ultimately the direction will be determined by the global fixed income market, not the UK chancellor.

 

Gilt yields have moved back up.png

Fiscal drag – the Chancellor will continue to rely on the effects of the fiscal drag. Tax receipts have ballooned thanks to frozen thresholds on things like capital gains, personal income and inheritance tax. For instance, self-assessment income tax receipts hit almost £22bn in January, up a third in a year. But don’t expect the Chancellor to review thresholds even as the squeezed middle becomes even more likely to squeak – this is too valuable an earner for the Treasury and avoids the more unpopular cut-and-hike cycle to tax rates. Moreover, a high tax burden will be seen as a useful way to rein in inflation – monetary and fiscal policy working in tandem. Or as Lenin put it: "The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation." Chairman Hunt knows the script.

Energy prices - consumers and some utility companies will be hoping for government support on energy prices to be extended beyond April. Given the decline in energy prices and a likely fall in the Ofgem cap later this year, it makes sense to pursue this as it would only be for a short period and would help smooth out consumer energy bills and face down loud calls from Labour.

Windfall taxes – energy companies might face more pressure to share more of the enormous profits they have garnered in the last year. Raising taxes on profits is politically easy but goes against the government’s business investment aspirations.

IPOs – will the chancellor have anything up his sleeve to address concerns the City of London is losing its lustre as a top destination for global companies? Major changes to listing rules and the like will be for another day, but there could be a nod with some tax-related changes.

Biz investment – Business investment in the UK has been woeful since Brexit. Labour is drawing up plans to review the entire business tax regime in a bid to boost investment and growth. Shadow chancellor Rachel Reeves – chancellor in waiting many would say – announced plans on Tuesday (March 7th) that could force the incumbent into changes, albeit any such changes would be tinkering at the edges of the problem. Maybe expect some limited tax breaks for capital investment but the Treasury cannot afford more.

No relief for big business – despite calls for the chancellor to scrap a planned corporation tax hike, Mr Hunt will almost certainly press ahead with the planned increase in the rate larger companies pay from 19% to 25%. Investment incentives are also ending with the corporation tax super-deduction, which allows businesses to reduce their tax bill by 25p for every £1 that they invest, will also end. As per the above, the chancellor might extend this scheme to boost investment, but it has been incredibly costly to the Treasury. Instead less costly and limited tax breaks are possible.

Defence spending – this may be pre-announced: Rishi Sunak is expected to use a trip to the USA to announce a boost to defence spending. Clearly the military requires more but how much more is uncertain – one-off boosters seem more likely than any commitment to raise spending from 2% to 3% of GDP.

Stamp duty – Tory chancellors love to give something to homebuyers to juice the property market. Stamp duty has been a preferred measure to tinker with in recent years. Housebuilders like Persimmon and Taylor Wimpey report sales are about 20-30% lower at the start of this year, whilst prices have slumped by the most in a decade. Falling prices are good for first-time buyers, so stamp duty tinkering seems unlikely at this Budget. More important in this equation is the bond market and the Bank of England. The housing market is still recovering from the effects of the mini-Budget last September – so the gilt market reaction on March 15th probably matters more.

Inflation Reduction Act, UK style? HAHAHAHA, YOU HAVE TO BE KIDDING ME! Seriously though there might well be subsidies for more ‘green crap’ (I quote a former Prime Minister).

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