UK spring budget statement: More room to manoeuvre

Executive summary:

  • In contrast to his ad-hoc fiscal statement in the autumn, UK Chancellor Hunt’s spring budget offered some fiscal relief for working parents and pension savers amid the need to maintain market confidence.
  • Interest rates on government debt are much higher than a year ago and the cost-of-living crisis is being felt acutely by many households.
  • However, as tax revenues turned out higher than expected and energy prices have declined significantly in recent months, the outlook for the UK economy appears less bleak than six months ago.

Here are some key measures announced by the Chancellor at today’s budget statement:

  • The energy bill support that caps the average household bill at £2,500 will continue for another three months until the end of June 2023
  • Extended free childcare of 30 hours a week for working parents is phased in to cover younger children from the age of 9 months
  • Increase in the annual pension saving allowance from £40,000 to £60,000 and abolishment of the lifetime allowance
  • The Treasury will go ahead with the planned rise in corporation tax from 19% to 25%
  • 12 new Investment Zones are created across England to stimulate the UK's economic growth

The measures on childcare and pensions have been widely flagged beforehand as a way to get more people into work or keep them in work. For example, raising the annual pension allowance and abolishing the lifetime pension allowance aims at keeping doctors and consultants working in the National Health Service, instead of retiring early or reducing hours worked for tax reasons. Other professions will be able to take advantage of the more generous pension allowances.

OBR predicts technical recession can be dodged this year

As recently as its February Monetary Policy Report, the Bank of England was forecasting a recession for the UK economy that would last the best part of 2023. Sharply higher interest rates are expected to weigh on the housing market and falling inflation-adjusted incomes dampens the ability of households to spend. For today’s budget announcement, the independent Office for Budget Responsibility predicts that a technical recession can be avoided this year.

Slight improvements in UK economic outlook

We think that economic prospects have turned somewhat less bleak due to several factors. In April, around 20 million adults will benefit from a 10% uplift in their state pension, universal credit or living wage, easing the cost-of-living challenge. The extension of the energy bill support announced today and the decline in wholesale gas prices should also lessen the burden on households. 

Notwithstanding the slight brightening of the economic outlook for 2023, long-term challenges remain formidable. The UK is the only G7 country yet to regain its pandemic level of economic output, a sign of sluggish productivity. According to the Office for National Statistics, productivity growth in the UK has lagged that of comparable economies in 2020-21 (with the exception of France).

The bottom line

Today’s budget announcement tries to walk a fine line between maintaining market confidence in the UK’s debt sustainability and adding growth-enhancing measures. Financial markets mostly shrugged off the budget news.

UK bond markets took the budget in their stride and are currently more impacted by global developments, especially the recent bank failures in the US. As traders are still nervous about the health of these and other banks, the 10-year UK gilt yield fell by 19 basis points to 3.31% today, in line with other developed-country bond markets. The lion’s share of bond market pain should be behind us, in our view, as the Bank of England and other major central bank approach their interest rate peak.


Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.