Equity Research; 2023 Budget

2023 Budget

The Chancellor now expects the UK economy to contract by 0.2% in 2023, as opposed to previous ONS forecasts of -1.4%.

Looking forward GDP growth of 1.8% is expected in 2024 rising to 2.5% in 2025. The UK’s debt to GDP is expected to decline to 92.4% in 2024.

The inflation rate is forecast to decline to 2.9% by the end of 2023 from 10.1% in January 2023. This assumes a rise in the unemployment rate of 1% as a result of the slowing UK economy.

The main Budget changes are as follows:-

Pension Lifetime allowance abolished

• The £1m lifetime pension allowance has been abolished allowing the workforce to add more to their pensions.

This move is expected to encourage the over 50s back into work. Since the C-19 pandemic the UK has lost a significant number of the working population aged over 50 creating skills shortages and pay inflation.

New Investment Zones

• The creation of 12 new investment zones funded by £80m each over the next five years will help create “12 New Canary Wharfs” according to the Chancellor. The zones will be led by partnerships between local government, universities and small businesses.

This ambitious plan will succeed if only 1 of the 12 investment zones morph into another Canary Wharf.

Corporation tax

• Corporation tax has increased to 25% from 19% for companies with pre-tax profits above £250k
• For those companies with taxable profits between £50k to £250k will pay between 19% and 25%.
• For those companies with taxable profit of under £50k will pay the same 19% rate.

After a 5 years absence the smaller company rate returns! Corporation tax rise was flagged last October and the Chancellor has followed through.

Defence Spending

• £11bn to be added to the Defence budget over the next 5 years with the intention of lifting spending to 2.25% GDP by 2025.

Whilst below Ben Wallace’s requests, the move to boost defence is long overdue and considering geopolitical tensions the right course of action.

Energy

• The £3bn Energy Price Guarantee is to remain in place for another 3 months ; leaving the cap at £2,500.
• The £400 Winter Discount ends in April as planned
• Fuel duty – the planned April rise (which would have added 7p/ ltr) has been delayed one year whilst the temporary 5p fuel duty cut was kept in place.
• “Great British Nuclear” (“GBN”) will help energy companies find suitable sites for nuclear power plants. The objective is to ensure 25% of UK energy is sourced by UK nuclear facilities by 2050.

This price freezing measure costing £6bn should reduce inflationary expectations. GBN is likely to get the Green Lobby up in arms, and rightfully so given the very patchy global safety record of nuclear power.

Small & Medium Sized Company Allowance

• Companies are allowed an annual investment allowance of up to £1m which if spent in the financial year can be fully offset in that year against taxable profit.
  This is intended to help boost plant & machinery investment

Devolved Government grants

• Scottish government to receive an extra £320m
• Welsh government to receive an increase of £180m
• Northern Ireland executive to receive an increase of £130m

Childcare

• The age to qualify for childcare has been expanded to include children as young as 9 months i.e. when maternity leave ends. For all parents who work at least 16 hours per week, they will be able to claim 30 hours of childcare for children aged from 9 months to four. All parents will be entitled to at least 15 hours.
• This £6.5bn measure will target help to working parents and stem the workforce leakage that occurs when children are born. This is expected to be a popular measure to help cost of living issues and encourage workforce participation.

Artificial Intelligence/ UK supercomputer

• The Chancellor has accepted the recommendations of the UK’s Chief Scientific Adviser Sir Patrick Vallance including a proposal to provide £900m towards developing a new UK super computer.
• An ‘AI Sandbox’ will help companies bring products to market more quickly.
• An annual £1m prize to be awarded each year for the next 10 years to AI researchers for the best innovations.

Conclusion

This was a carefully considered Budget aimed at increasing UK productivity and boosting its workforce output. One of the reasons for the slow rebound since the C-19 pandemic has been a smaller workforce and a loss of expertise and leadership due to early retirement/ work/life balance issues. Whilst great for the individual, early retirement does not boost the UK’s economic performance.

There is an equal focus on ‘cost of living’ issues and not piling on economic hardship. The childcare plan will help young families and amounts to fairly obvious ‘vote buying.

Capital markets have ‘bigger fish to fry’ today (UK100: -3%) and the Budget has fallen on deaf ears. The rise in UK corporation taxes to 25% will hit EPS, profit growth and dividends, taking companies back to the prevailing tax rate a decade ago. The government has re-prioritised the UK’s social fabric today at the expense of the private sector, so relatively typical mid-term positioning, which was expected.