Following the fallout from Kwasi Kwarteng’s disastrous mini budget six months ago, the first statement of 2023 was pitched by chancellor Jeremy Hunt as a blueprint for “long-term, sustainable, healthy growth”.
Despite narrowly avoiding a recession, the UK economy has flatlined. The Office for Budget responsibility (OBR) is forecasting an economic contraction of 0.2% in 2023, before returning to growth next year. The recent collapse of Silicon Valley Bank – which sent shockwaves across the financial markets – has highlighted the precarious position the global economy is in.
Within the budget were a number of measures aimed at boosting business investment and bringing some of the 8.9 million economically inactive Britons back into the workforce. The chancellor will hope that these policies will help the government meet its aim of halving inflation, growing the economy and reducing debt.
1 – Free childcare support
One of the biggest spending commitments announced was a £4bn expansion of free childcare provision.
PWC’s latest Women in the Workplace report found that British parents earning the average UK wage will spend 29% of their income on childcare – one of the highest proportions of any OECD country.
The crippling costs, and the fact that the caring responsibility often falls to mothers, means that many women feel left with no choice but to drop out of the workforce. The Office for National Statistics estimates that 1.1 million people don’t work because of caring responsibilities – a million of which are women.
As part of the changes announced by Hunt, parents of one and two-year-olds will be entitled to 30 hours of free childcare per week. It is hoped that this will help parents of young children return to the workforce sooner and will only apply to households where both parents are in employment.
The changes, however, will be introduced in stages. Working parents of two-year olds will be able to access 15 hours of childcare from April 2024. This will be extended to all children more than nine months old in September 2024, before all under-fives are given the full 30 hours free childcare per week from September 2025.
Funding will be made available to schools and local authorities to improve wraparound care provision at the start and end of the working day. This will allow parents to drop their children off at school between 8am and 6pm but will not come into effect until September 2026.
2 – Addressing economic inactivity
Childcare entitlement was not the only measure aimed at addressing the UK’s chronic labour shortages. New incentives were also announced to persuade over-50s, those on benefits, those in poor health, and people with disabilities, out of economic inactivity and help fill the UK’s 1.1 million job vacancies. This has led some economists to dub the Spring statement the “back to work” budget.
The Resolution Foundation claims that three-quarters of the 830,000 working-age adults that left the labour market during the pandemic are aged over 50, many of whom have gone into early retirement. As a result, Hunt revealed a shake-up to current pension rules in the budget, which are intended to keep older workers from reducing their hours or exiting the labour market as they approach retirement age.
The amount of money that workers can accumulate in their pension pots, before paying additional tax, will be increased from just over £1m to £1.8m. The annual tax-free pension allowance, meanwhile, will be increased from £40,000 to £60,000 per year and the £4,000 limit on pension savings, for those who have already dipped into their private retirement funds, will be put up to £10,000 per year.
However, the relaxation of the tax limits are only likely to benefit the highest earners, with Lane Clark & Peacock estimating that only 1.3 million people are currently at risk of breaching the current lifetime limit.
An update to the Department for Work and Pensions mid-life MOT and the introduction of returnerships – a new type of apprenticeship for over-50s who wish to re-enter the workforce – rounded off the new provisions for older workers.
There were also changes for those who are economically inactive due to long-term sickness or disability, including the scrapping of the Work Capability Assessment.
A new employment scheme called Universal Support will provide £4,000 of funding per person to help people with disabilities find appropriate employment opportunities, with 50,000 places funded each year. Hunt claims that with new working models that “make it easier to work from home”, people who are currently unable to work should be able to find positions that suit them.
A £400m plan to increase the availability of mental health and musculoskeletal resources was also announced, while the chancellor warned that “sanctions will be applied more rigorously” to those on Universal Credit who fail to meet the work-search requirements or choose not to take up a reasonable job offer.
3 – Business tax shake-up
Hunt defended the government’s plans to go ahead with a rise in corporation tax, after Conservative MPs warned that it would have a “chilling effect” on the UK economy.
Corporation tax is set to increase from 19% to 25% from next month, representing the biggest such rise in nearly 50 years. The change comes alongside the expiration of the super deduction, which offered businesses generous tax breaks for investment in assets and equipment.
Replacing it will be a new scheme for full capital expensing which will allow every pound a company invests in IT equipment, plant or machinery to be deducted from its taxable profits. Hunt says the change equates to a tax cut for businesses worth an annual average of £9bn for the three years it will be in place. The OBR predicts it will increase business investment by 3% a year.
Hunt also announced 12 new Investment Zones across the UK. The regions identified so far include West Midlands, Greater Manchester, the North East, South Yorkshire, West Yorkshire, East Midlands, Teesside and Liverpool. He confirmed that there will be at least one Investment Zone in each of Scotland, Wales and Northern Ireland.
The chancellor envisions each of these areas being “potential Canary Wharfs” and areas that are successful in their bid will get access to £80m pounds of support for a range of interventions including skills, infrastructure, tax reliefs and business rates.
The Annual Investment Allowance for small businesses will increase to £1m, enabling 99% of businesses to deduct the full value of all their investments from their annual taxable profits, and research-intensive businesses were also promised additional tax breaks. SMEs that commit 40% of their total expenditure to research and development will be able to claim back £27 for every £100 spent.
Will the ‘back to work‘ budget do its job?
Despite a rise in corporation tax and the end of the super deduction, the Confederation of British Industry‘s interim director general believes the introduction of full capital expensing will be sufficient to “keep the UK at the top table for attracting investment”.
However, the director general of the British Chambers of Commerce Shevaun Haviland struck a less optimistic tone, stating that the “jury is out on how it will impact businesses compared to the super deduction scheme”. She also shared her disappointment at the lack of energy bill support for businesses, with the current relief scheme set to end in April.
Although business leaders will welcome many of the measures aimed at encouraging people back to the workforce, with a number of policies being phased in, they will do little to address the labour shortages companies currently face.
Glassdoor’s UK economist Lauren Thomas believes that childcare for working parents and training for early retirees are a good start, but “what impact this will have remains to be seen”. She warns that, despite the measures announced today, hiring will remain difficult throughout 2023 and “continued long-term thinking will be needed to meet the staffing crisis we face”.