UK Budget 2023: the Hunt for growth

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After the fiscal tumult of late 2022, following September’s “mini-budget”, the Chancellor was probably aiming for a more low-key Budget yesterday. The word “boring” had been used by commentators in advance, and there were no major new announcements that hadn’t been trailed prior to the Statement, although some went further than expected.   

Having said that, UK Budgets are always significant. They have implications, both direct and indirect, for people in Scotland and the Scottish Budget. Not only via the UK-wide measures which apply in Scotland, but also for the UK Government spending announcements (in areas devolved to the Scottish Parliament) which feed into the Scottish Budget via Barnett consequentials.  

This blog summarises the economic outlook, some of the key elements announced, and the implications of the UK Government’s choices for Scotland.  

Economic outlook: no “technical” recession and modest growth returning

After well over a decade of below trend economic growth, the Chancellor was keen to emphasise his intention to turn that around.  

Forecasts from the Office for Budget Responsibility (OBR), although still pretty poor for this year, point to an improved economic outlook relative to what was being anticipated in the previous November 2022 forecast. However, forecasts for growth in future years remain subdued. 

This translates to a shorter and shallower fall in the economy over the first half of this year, with GDP falling by 0.5% rather than the 2% previously forecast.  

Over the course of 2023, the OBR now predicts the economy will fall by 0.2% (compared with -1.4% previously) and then grow by an average of 2% per annum over the subsequent years of the forecast. The Chancellor will be pleased to be basing his fiscal plans on OBR economic forecasts rather than Bank of England economic forecasts, which are more pessimistic

With energy prices and inflation lower than forecast back in November, the OBR is now projecting inflation to fall from 11% at the end of 2022 to 2.9% by the end of 2023.  

The better economic outlook forecast by the OBR gives the Chancellor a public spending windfall of approximately £25 billion a year, around two thirds of which he has allocated to new measures in this Budget.  

The OBR also expects the Chancellor’s two fiscal rules to be met. Borrowing is forecast to be below 3% of GDP in 2027-28, with a relatively comfortable cushion of around £40 billion. However, the target of reducing underlying debt as a % of GDP in 2027-28, is forecast to be met “by a historically small margin”.  

So, what are the new measures?

When thinking of the UK Budget from a Scottish perspective, it is helpful to divide announcements into those which are UK wide, and apply to Scots, and those which don’t.  

UK wide policies

Heavily trailed in advance, the Chancellor has extended energy cost support by an additional three months. This policy will apply in Scotland. This means that the unit price and standing charges will remain capped at a level where a household with typical usage will pay £2,500 per year for their energy bills.  There was also support announced for those on pre-payment meters, saving households on prepayment meters £45 per annum, and bringing their bills in line with other customers 

Corporation tax will increase to 25% (as previously announced) in April 2023, but this Budget allows businesses to write off the costs of qualifying investments in plant and machinery against their tax bill. This is aimed at incentivising business investment and will be in place for three years from April.  

Non-draught alcohol duty will increase by 10.1% from August 2023, a move that has been criticised by the Scotch Whisky Association.  

Fuel duty is yet again frozen at a cost to the Treasury next year of £6 billion, with the OBR also pointing out their estimate that the “cumulative cost of freezing fuel duty rates between 2010-11 and 2023-24 relative to increasing them in line with RPI inflation has risen to around £80 billion”  

Pension changes designed to encourage older workers back into the workforce were announced. These include the removal of the lifetime cap on tax-free pensions savings and an increase in the tax-free annual pension allowance from £40,000 to £60,000. These moves are also designed to stop over 80% of NHS doctors from receiving a tax charge for any additional hours worked

There was also an announcement that Universal credit payments to cover childcare can be claimed upfront (i.e. when payment is due to the childcare provider), as well as an increase to the amount that can be paid, to £951 for one child and £1,630 for two children.  

In terms of UK Government direct investments as part of the “levelling up” agenda, it was announced that there would be at least one proposed investment zone in Scotland (destination unknown). Among the other projects to receive funds are the following: 

  • £8.6 million of funding to support the Edinburgh Festivals 
  • £1.5 million to fund repairs to the Cloddach Bridge in Moray.  

Policy not applying in Scotland – but with additional money attached

One of the announcements which received significant attention, but which will not apply in Scotland, relates to an expansion of free childcare in England, a matter devolved to the Scottish Parliament.  Scotland and England both have 30 hours per week policies for 3 and 4 year olds. In Scotland, all parents are eligible for this whether they work or not, and the Scottish Government is planning further expansion to younger children. In England, only parents in full time work receive the full 30 hours, and if not, they get 15 hours free.  

Yesterday’s announcement extends the English policy to children from the age of 9 months, to be rolled out in stages between now and September 2025.  

Although this policy will not apply in Scotland, the Scottish Budget will receive proportional “Barnett consequential” funding from the decision which the Scottish Government can use as it chooses.  

In total, as a result of all the various UK Government announcements made yesterday, the Scottish Budget will increase by £320 million over financial years 2023-24 and 2024-25. At the time of writing, we still do not have details on the precise UK Budgetary decisions from which they flow, and the split between years. It appears that the bulk of these additions come from the UK Government’s childcare policy with most of these Barnett consequentials flowing in 2024-25.  

The fact that Barnett consequentials are not published alongside the UK Budget is another transparency gap in the provision of Budgetary information, as highlighted in our recent blogs on the topic.  

Will the Scottish Government opt for similar policy to the UK Government?

As ever, the Scottish Government is free to spend Barnett consequentials as it wishes, and does not have to follow rUK policy, although there is often pressure to do so.  

On childcare, the Scottish Government is already pursuing plans to extend the provision of free childcare, so the additional resources could provide support for existing plans (and allow any resources already devoted to the expansion to be diverted elsewhere). 

How to allocate the additional resources from yesterday’s Budget will be among the many choices facing the new First Minister when he or she takes up the role in less than two weeks.  

Ross Burnside, Senior Researcher, Financial Scrutiny Unit