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Hawksmoor Research: Spring Budget Review

This is the first full budget in 18 months when two chancellors – Nadhim Zahawi and Kwasi Kwarteng came and went. It is worth remembering some of the key decisions were already announced in the Autumn statement – for example benefits and state pensions increasing by 10.1% from April 2023. The 45% tax rate has also already been lowered from £150,000 to £125,140 from April this year. The National Living Wage is increasing from £9.50 / hour to £10.42 (9.7%) for staff aged 23 and over, which is around two million people.

The economic background is the OBR is forecasting inflation to be down to 2.9% by the end of 2023. Prime Minister Rishi Sunak has a target of halving the Q4 2022 number (10.7%) by the end of 2023. The OBR also materially increased its UK GDP forecast of -1.4% from November 2022, up to -0.2%, followed by 1.8% in 2024, 2.5% in 2025 and 2.1% in 2026. Jeremy Hunt also said he remains committed to returning inflation to 2% in the longer term. He has a fiscal rule of keeping public sector net borrowing below 3% of GDP which he is expected to meet by the end of the forecast period. Public sector net debt is expected to peak at 97.6% of GDP in 2025-26, before falling to 94.6% by 2027-28. The OBR is also forecasting disposable incomes to fall by 6% per person in this financial year and next.

Inflation is still high – we are still in a cost of living crisis, and the government has offered some support. The Energy Price Guarantee (EPG) has been extended for a further three months and will stay at £2,500 /year to the end of June 2023. It is expected to save the average family £160. After this it will go up to £3,000. This is expected to cost around £3bn. Prepayment tariffs are also being aligned to be the same as direct debit charges, so people with prepayment meters are no longer paying more. Also on cost of living – the 5p fuel duty cut made in March 2022 has been extended for another year. This will cost around £6bn. Duty on alcohol and tobacco will increase.

On more general cost of living issues, the budget goes some way towards addressing childcare costs, which have been high in the UK for some time. There are half a million parents with a child under three in England who do not work, due to childcare responsibilities. Working parents with children between nine months (when maternity leave ends) and five years old will be eligible for 30 hours of free childcare per week. This extends current eligibility of three and four year olds to include nine months to two years old. It will be introduced gradually from April 2024, and will be up to the full 30 hours or everyone in September 2025. Some questions have been raised about whether there are enough nurseries and staff to deliver this, and the government is increasing funding and adding incentives for child carers. Families on universal credit will be given childcare funding in advance, instead of having to claim it back. The per child limit of £646 / month is being increased to £951 – in case context is needed for what it costs.

Probably the biggest issue in the budget from an investment point of view is the changes to corporation tax. The rate increase to 25% from 19% was announced by Rishi Sunak in April 2022, but has seen resistance from within the Conservative party and apparently in response to this, capex tax relief measures have been added. Qualifying capex now attracts up to £9bn per year of tax relief for three years from 1st April 2023. Capex here includes qualifying plant and machinery – it is designed to promote investment and growth. This is likely to affect for example renewable energy producers and would potentially reverse some of the windfall taxes they paid in 2022. It’s important to note that the tax break ought to be disinflationary, at the margin – allowing producers to invest to produce more, increase supply and reduce price.

£20bn of investment spend on carbon capture and storage technologies was announced, through to 2050. Carbon capture means preventing fossil fuel emissions from entering the atmosphere, by either re-using it or storing it under ground, for example under the North Sea in old oil and gas reservoirs. The government has a commitment to remove carbon from electricity production by 2035, and is trying to build a carbon capture power station by the mid-2020s, but is behind on the project. In 2021, the UK emitted 425m tonnes of CO2, and has a target to capture 20-30 million tonnes of CO2 by 2030. The power station would capture only about 2 million tonnes, but there are other ways to do it as well as power generation.

There is also support for UK nuclear power. Nuclear is now being classed as environmentally sustainable in the UK, which allows it to access the same investment incentives as existing renewables. This is in response to both energy issues arising from the war in Ukraine and net zero. The UK has a target of 25% supply of electricity consumption by nuclear power by 2050. At the moment, only one existing nuclear power station – Sizewell B – is scheduled to still be running in the UK after 2028. Sizewell C is still looking for more funding in partnership with EDF and is expected to cost more than £30bn. Hinkley Point C in Somerset has had numerous delays and over-runs. The EU labelled nuclear as “green” in 2022, but has faced challenges from for example Greenpeace. Uranium is not renewable and there are multi-year environmental issues in the decommissioning of old sites, such as Sellafield. The nuclear incentives are also partly in response to the US Inflation Reduction Act (IRA), which has already had a big impact in the US. The IRA is a $369bn package introduced in August 2022 and is designed to reduce carbon emissions, reduce healthcare costs and increase taxable domestic revenues. It is part of a global trend towards onshoring. The UK will announce its own version at the Autumn statement in 2H 2023. It will include measures to “unlock productive investment from defined contribution pension funds and other sources” A paper has been published and circulated looking for feedback on five questions around the Long-term Investment for Technology and Science (LIFTS), with responses expected in May 2023.

The part of the budget that has received perhaps the most criticism is abolishing the lifetime allowance for pensions. Consensus before the announcement was an increase to £1.8m, so abolishing it completely was a surprise. The previous limit was £1.07m with anything over this attracting 55% tax, and had been frozen until at least 2026. Jeremy Hunt has also increased the tax-free annual pension contribution allowance from £40,000 to £60,000. The reason Jeremy Hunt says he did it was because many professionals – including NHS consultants and GPs were retiring early having hit the limit and not wanting tax bills from exceeding the limit. It Is expected to cost the Treasury a total of £4bn over 5 years. Labour have said they will reverse this. There is an OBR report saying that the changes will only incentivise around 15,000 people to stay in work. Aon have estimated that if you were able to save £60,000 per year for 40 years, you could end up with a pension pot of potentially £9m. It also amounts to an inheritance tax break as defined contribution pensions are usually exempt from inheritance tax. If the person dies before 75 then they can leave an unlimited amount tax free. After 75 it would be taxed at the beneficiary’s marginal rate.

There are other potentially less controversial ways to get people back in work following the pandemic. The government has been looking at the mechanisms of welfare payments for some time. They have scrapped the work capability assessment for disability payments and there will be only one health and disability assessment – the Personal Independent Payment (PIP) assessment. It broadly means that benefit entitlement will be separated from ability to work.

Robert Fullerton – Senior Research Analyst

Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority ( with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of Robert Fullerton. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.

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