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Chancellor’s Budget optimism blunted by global financial market instability fears

Date Published: 17/03/23

Chancellor Jeremy Hunt’s Spring Budget sought to balance fiscal prudence amid a persistent inflation battle with targeted spending to unblock labour market inactivity and promote investment after the largest corporation tax hike in almost half a century. Short-term boosts to business investment do not obscure the UK economy’s fragility, which has been heightened by recent global financial market instability risks.

The chancellor aimed to ease the pressures keeping the UK’s labour markets tight and offset the impact of the hike from 19% to 25% in the main rate of corporation tax, with short-term business investment incentives which broadly leave the size of the economy the same over the next five years, according to the Office for Budget Responsibility (OBR). In this article, we will review the salient policies and impact on the economy and key industries. First, to the extraordinary backdrop of Budget day itself.

Global financial stability fears reignite

The Budget was delivered on an extraordinary day in global markets and created a palpable sense of real-time dissonance. While Hunt was announcing in the House of Commons on Wednesday lunchtime (15 March) that the OBR had revised its outlook for the UK economy with a base case that averts a technical recession, European banks were reeling as financial market instability fears reignited with fervour. Four months ago, this chancellor delivered the November Autumn Statement containing a swingeing £55bn in tax rises and a promise to restore the UK’s public finances in the aftermath of Kwasi Kwarteng’s disastrous mini budget. Now, less than six months later, he has delivered his first Spring Budget amid concerns over a fresh banking crisis, following last week’s breakneck collapse of Silicon Valley Bank (SVB).

Credit Suisse’s (CS) stock price plunged 28% to an all-time low in premarket New York trading, after Saudi National Bank ruled out increasing its 10% stake in the troubled investment bank on regulatory constraints. It led to a sharp sell-off in global banks, sparking renewed investor fears of broader risks in the financial system. At the same time, Hunt told the Commons that the OBR predicts UK economic growth will be 0.2% in 2023, followed by 1.8% in 2024, 2.5% in 2025, and 2.1% in 2026. However, any escalation in problems within the global banking system will weaken UK economic activity. At the same time, the OBR forecasts annual CPI inflation will fall to 2.9% by the end of 2023, down from 10.1% in January, which would represent the sharpest one-year disinflation since the 1970s, according to the Resolution Foundation. February’s inflation print is published next week (22 March).

By the close of trading yesterday, Swiss National Bank (SNB), Switzerland’s central bank, said CS will receive a liquidity backstop. “If necessary, the SNB will provide CS with liquidity”, SNB and FINMA, Switzerland’s financial markets regulator, said in a joint statement on Wednesday. Subsequently, CS borrowed up to 50bn francs ($54bn) from SNB to boost liquidity and repurchase senior debt. On Monday, the UK subsidiary of SVB was sold to HSBC for £1 in a rescue deal led by the Prime Minister Rishi Sunak and the Bank of England. This swift move protected SVB’s 3,300 UK clients, including start-ups, venture-backed companies and funds, across the UK’s tech and life sciences industries. Events are a timely reminder that 15 years of ultra-low interest rates have left hidden leverage lurking in the global financial system which are yet to fully resolve.

Labour market

Inflation continues to outpace wage growth as UK labour markets remain historically tight. While the numbers of job vacancies continues to fall – by 51,000 to 1.1 million in the three months to February 2023 – some industries continue to suffer from chronic shortages of skilled labour. Vacancies have proved difficult to fill due to three major problems. First, working-age people retired early during Covid-19. Second, the UK has 2.5 million working-age people not working due to long-term sickness, reflecting a higher rate than European counterparts. Third, the high cost of childcare prevents both working parent families from being in full-time employment. Skilled labour shortages have fuelled wage growth pressure for employers over the past two years. Inflation-adjusted total wage growth fell by 3.2% year-on-year in January, according to Office for National Statistics (ONS) data.

Hunt announced measures intended to boost labour participation, which in turn would soften wage inflation pressures with policies intended to increase the number of people willing and able to work. These included:

  • 30 hours of free weekly childcare to working parents of children aged nine months up to three years in England to support families who cannot afford childcare;
  • raising the annual pension tax-free allowance from £40,000 to £60,000, to discourage early retirement, particularly among those in their 50s; and
  • scrapping the lifetime allowance on tax-free pension pots, currently at around £1 million.

The Institute for Fiscal Studies (IFS) warns that the benefits of the 30-hour childcare scheme are entirely eroded for families with earnings above £100,000, leaving high-earning parents worse off. The Government is also reportedly considering loosening rules to allow more foreign workers in labour-strapped industries, such as the construction sector. The Work Capability Assessment (WCA) will be abolished allowing people with disabilities to try employment without fear of losing welfare benefits, which represents the biggest change in disability benefits in a decade, according to the Resolution Foundation. In aggregate, the OBR estimates these measures should increase the workforce by 110,000, or around 0.3%, by 2027–28. This is a smaller boost to employment than higher migration of 160,000.

Business investment

The Budget contained several ways to promote business investment, which has languished since Brexit, and offset the long-tailed corporation tax increase, the largest since 1974, which comes into effect next month.

Hunt replaced the expiring 130% tax relief on companies’ purchases of equipment, known as the “super-deduction”, with “full expensing” for the next three years. The policy – intended to soften the sting from the planned corporation tax hike – aims to boost investment by allowing companies to claim 100% capital allowances against taxable profits on qualifying plant and machinery investments. OBR says this will cost £9bn a year and increase business investment by 3% annually. In addition, the chancellor announced tax credit schemes for smaller research-intensive companies and the film and TV industry.

Energy Price Guarantee

The UK Government has capitalised on the 50% fall in wholesale energy prices since last October to extend the energy price cap for households by three months to June. The massive run-off in energy prices has enabled the Treasury to scrap the 20% increase in the Energy Price Guarantee (EPG) from £2,500 to £3,000, while reducing the expected cost of the scheme to the Government by around £11bn, according to Capital Economics estimates. The cost of the three-month EPG extension is estimated at £2.7bn.

In early January, the Energy Bills Discount Scheme (EBDS) was extended by 12 months to April 2024. The scheme aims to prevent business collapse due to high global energy prices. The chancellor is committed to a capped EBDS liability of £5.5bn. The British Chambers of Commerce (BCC) said almost half of UK businesses expect to struggle to pay their energy bills from April and measures announced in the Budget will provide little comfort. “They cannot invest when they are fighting to survive”, said BCC’s Director General Shevaun Haviland.

Tax avoidance schemes

Plans were announced to tackle promoters of tax avoidance schemes, such as payroll umbrella companies which are defrauding the HMRC of hundreds of millions of pounds through evasion of income tax, National Insurance (NI) contributions and VAT.

Investment zones

The chancellor confirmed a commitment to provide almost £1bn across 12 new low-tax investment zones around the UK designed to accelerate national productivity growth and reduce regional disparities.

Each investment zone will receive £80m over five years to boost UK competitiveness across five high-potential industries: the digital and technology sector, life sciences, creative industries, green industries and advanced manufacturing.

Funding can be used flexible between investment and business tax incentives (e.g. relief on stamp duty, business rates or employer NI contributions), including to increase workers’ skills, provide specialist business support, improve the planning system and for local infrastructure. The policy scales back an earlier Liz Truss policy, which imagined 200 new investment zones worth a total government budget of up to £12bn.

Eight zones will be located in the East Midlands, Greater Manchester, Liverpool City Region, North East, South Yorkshire, Tees Valley, West Midlands and West Yorkshire. Four zones will be in Scotland, Wales and Northern Ireland. The full document is here.


The scrapped near-term recession forecast was moderated by lower growth in later years, which provided the chancellor with a little extra headroom. “We suspect the Chancellor may have more headroom to cut taxes/raise spending later this year”, wrote Paul Dales, Chief UK Economist at Capital Economics, “[as] the political motivation to prime the polls ahead of an election in 2024–25 will be growing.”

The chancellor’s support for households, in childcare and energy bill costs, and policies to firm up labour markets were broadly well received by business groups and trade bodies. However, some vulnerable sectors believe more could be done to help their industries.

Retailers and tourist-focused businesses decried the Treasury for overlooking the reinstatement of tax-free shopping for tourists and a failure to fix the Apprenticeship Levy system. In the case of the former, reinstalling tax-free shopping for international visitors and investors would prevent diversion of “billions of pounds of spending away from Britain to France, Spain and Italy”, according to Paul Barnes, Chief Executive of the Association of International Retail. In the case of the latter, Helen Dickinson, Chief Executive of the British Retail Consortium said current rules restrict businesses from directing Levy funds to train employees with the skills the UK economy needs. Fixing the system could unlock £3.5bn in Levy funds unused over the last three years, according to Dickinson, allowing the chancellor to “increase investment in our workforce, helping businesses to prepare the UK economy for the skills it needs”, without spending a penny.

In construction, housebuilders lamented the Government’s failure to address barriers to housing delivery. The Home Builders Federation (HBF) cites three causes: planning policies, the interpretation of EU laws on ‘nutrient neutrality’ and diminishes the availability of affordable mortgages. 

The Treasury also declined to answer long-running calls to reform business rates. “If the UK’s innovative growth industries are to remain competitive on the world stage, then Government must shift the dial further on investment, both within the UK and from overseas”, said the BCC’s Shevaun Haviland.


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