Jeremy Hunt's U.K. Budget Is a Minimalist Master Class

The Conservative government is keeping its powder dry for the next election.
Jeremy Hunt, UK chancellor of the exchequer, holding the despatch box outside 11 Downing Street in London, UK, on Wednesday, March 15, 2023. Hunt will pledge to drive economic growth by unblocking business investment in his first budget, in which he will set out tax-and-spend policies for the last full year before the next election.
Jeremy Hunt, UK chancellor of the exchequer, holding the despatch box outside 11 Downing Street in London, UK, on Wednesday, March 15, 2023. Hunt will pledge to drive economic growth by unblocking business investment in his first budget, in which he will set out tax-and-spend policies for the last full year before the next election.

Chancellor of the Exchequer Jeremy Hunt set out the bare bones of what the next Conservative Party election campaign is going to focus on in his annual budget statement. Laying out the balance sheet of the state and deciding which line items are more deserving of extra monies is an intensely political process. Dull, but worthy, is the verdict on Wednesday’s performance.

This is was really only a placeholder, given a general election is likely in about 18 months. Next March's budget will be primed with many more electoral giveaways.

Although it was technically the third economic plan delivered in the past year, the main message is: We're back on track and can be (sort of) relied upon again to manage the affairs of state. The government is finally displaying a welcome degree of competency mixed with trying not to frighten the market horses, albeit against the backdrop of as many as half a million public-sector workers striking and protesting on Wednesday. The pound fell 0.6%, with the FTSE 100 index  down 3%, but it was the gilt market that had the most at stake. Ten-year yields are 18 basis points lower on the day at 3.3% but all these moves need to be taken in the context of the global tumult following the collapse of Silicon Valley Bank.  

There will be a reduction in the amount of government debt to be sold in the upcoming financial year to £241 billion ($290 billion), down from £306 billion initially planned. A reduction was widely expected after recent improvements in monthly government finances data, albeit coming in at about £10 billion more than market estimates. Nonetheless, this will still be the largest on record net amount of gilts sold of about £180 billion, excluding redemptions but including sales from the Bank of England's £80 billion quantitative tightening program.

The nuance is in how the Debt Management Office spreads out issuance across the yield curve. Some recent shorter-dated auctions have not been well received, so an anticipated shift to more issuance in shorter maturities was not quite as drastic, but sales of longer-maturity and index-linked gilts were reduced. Furthermore, investor needs have shifted from strong demand for long duration and convexity towards being more focused on straightforward income. As the UK yield curve is pretty flat from two years out to 10 years, an even spread of issuance works for all.  Quarterly issuance is likely to remain about the same, so the gilt market should take all of this is in its stride.

As is sadly the case with all modern budgets, a lot of Hunt's measures were in effect pre-announced. Maintaining the Energy Price Guarantee out to July, at the equivalent of £2,500 annually for the average household, delivers a lot of political gain for (now) relatively little cost. Similarly keeping a lid on petrol pump prices, by not raising the fuel levy as planned, is now in its second decade of use for successive chancellors.

Halving inflation this year is the easiest by far to achieve of Prime Minister Rishi Sunak's five goals. Most of the financial wiggle-room that Hunt has to play with was used to keep a lid on household energy bills, thereby calming consumer prices. This leaves the chancellor with slim pickings to make much headway with another of Sunak's goals: achieving positive growth in the last quarter of this year. There was a welcome upward revision in the Office for Budget Responsibility's gross domestic product forecast for 2023 to -0.2% from the -1.4% it anticipated in November.

A well-trailed £5 billion was added to defense spending over two years, a bigger priority now courtesy of the Ukraine war. This forms part of a wider Integrated Review.  Important political touchstones all received a light sprinkling of fiscal love: extra support for childcare, tax relief for research & development spending and monies towards securing a public sector pay deal that ends widespread strikes. All these will be political battleground issues at the next election. 

The hotly-disputed rise in corporation tax to 25% from 19% went ahead despite widespread dissent among Tory lawmakers, but with a spoonful of honey to make it more palatable. New allowances for capital investment (100% offset against tax) go someway to incentivize additional corporate spending. Former PM Liz Truss's grand plans for free ports and regional economic zones appear in a slimmed-down version, though this is more designed to appeal to the government's backbenchers than the electorate.

However, Hunt did leave room for a few carrots. Not only do state pensions go up by a record 10.1%, but the lifetime cap on private pensions has been abolished — the biggest surprise of the day. The annual allowance cap has been raised to £60,000 from £40,000. This is to encourage older workers to stay in employment for longer, and hopefully attract some back into the workforce (particularly in the health service). Since the pandemic there has been a sharp rise in the eligible but non-working workforce, not all of which can be explained by a rise in the long-term sick, which has exacerbated the tightness of the labor market and held back recovery.

Hunt’s delivery adds to the sense that momentum is slowly improving for the government after a series of political initiatives on Brexit, migration and foreign policy. There was a little bit more jam than had been expected after a particularly difficult 2022, and the chancellor eked it out with the theatrical flourish of an undertaker. But the overwhelming challenges from a cost-of-living crisis, rampant inflation and a moribund economy remain front and center — and are likely to decide which political party gets to choose the wallpaper at No. 10 Downing Street after the next election.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.

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