FTI Consulting Public Affairs Snapshot: Spring Budget 2023 – Has Hunt done enough to keep the Conservatives in the fight?

The Budget began with the news that the Office for Budget Responsibility expects inflation to fall from 10.7% to 2.9% by the end of 2023, considerably exceeding the ambitions previously set by the Prime Minister. This is significant news.

When, last month, Citibank predicted that inflation could be “close to 2%” by the end of 2023, the Government – conscious of the need not to overpromise and underdeliver – was deliberately cautious about pouncing on this. But having it set out formally by the OBR is very different. The challenge for the Conservatives will now be to make sure that this piece of news cuts through and that they can take at least partial credit.

There was further positive growth news, too. In November, the OBR expected that the British economy would enter recession in 2022 and contract by 1.4pc in 2023, however the OBR forecast today that Britain will in fact avoid a technical recession this year. There is still a contraction of 0.2pc forecast for 2023, but the figures then show the UK returning to growth: by 1.8pc in 2024; 2.5pc in 2025; 2.1pc in 2026; and 1.9pc in 2027.

Similarly, the deficit falls in every year of the forecast, with borrowing falling from 5.1pc of GDP in 2023-24, to 3.2pc in 2024-25, 2.8pc in 2025-26, 2.2pc in 2026-27 and 1.7pc in 2027-28. This meets the fiscal rule to have public sector net borrowing below 3pc of GDP over the forecast period with a buffer of £39.2 billion.

Meanwhile, debt will fall as a percentage of GDP by the fifth year of forecasts, with underlying debt forecast to be 92.4pc of GDP next year, 93.7pc in 2024-25, 94.6pc in 2025-26, and 94.8pc in 2026-27, before falling to 94.6pc in 2027-28. This meets the fiscal rule to have debt falling as a percentage of GDP by the fifth year of the forecast, and does so with a buffer of £6.5 billion. And, in the final two years of the forecast period, the Government is forecast to be running a budget surplus.

Overall, this is a significantly improved economic picture compared to when Hunt gave the Autumn Statement in November 2022. The big question is whether this will allow – or indeed tempt – the Government to move away from the “steady-as-she-goes, under promise and overdeliver” approach taken until now. That question will be as much one of party management and election planning as it will be of economic management.

• Corporation tax up from 19% to 25%. However, on business taxation, there will be a new policy of “full expensing” for the next three years, with the intention to make it permanent.
• Energy Price Guarantee extended for three months from April 2023, keeping the average household bill at around £2,500.
• £11 billion added to the defence budget over the next five years, reaching nearly 2.25% of GDP by 2025, with the aim to raise this to 2.5% as soon as possible.
• Carbon Capture Usage and Storage (CCUS) to receive £20 billion in a move that will support up to 50,000 jobs.
• “Great British Nuclear” will help nuclear provide one quarter of the UK’s electricity by 2050, with nuclear power also set to be classed as “environmentally sustainable” in Britain’s green taxonomy, subject to consultation.
• 12 new investment zones will receive £80 million each over five years and will be centred around British universities.
• Enhanced credit for small and medium-sized businesses that spend on R&D.
• Pensions annual tax-free allowance upped by 50% from £40,000 to £60,000, and the £1 million lifetime allowance abolished on pensions savings.
• 30 hours of free childcare per week for every child over the age of nine months, in families where all adults are working at least 16 hours per week.
• White paper to be published on disability benefits reform, including plans to abolish the Work Capability Assessment in Great Britain and separate benefit entitlement from an individual’s ability to work.

The Prime Minister might have hoped that his recent set of positive policy headlines would have turned his fortunes around more markedly. Such is the political era in which he’s operating that sadly for him – though perhaps inevitably – it has not been as transformative as it might otherwise have been.

Despite a successful negotiation of the Windsor Framework, which has paved the way for a major breakthrough in Northern Ireland’s political malaise; despite the Government’s Illegal Migration Bill, which seeks to address the small boats crisis ahead of the next election; and despite the helpful appearance alongside the US President and Australian Prime Minister this week to discuss the next stage of the Aukus alliance – the polls at home are still proving difficult to move.

After all, it has been less than six months since Kwasi Kwarteng MP’s “mini-Budget”, which led to Liz Truss MP’s downfall as the shortest-serving Prime Minister in British history. Since then, Jeremy Hunt MP has made a virtue of injecting stability into the economy over short-term pleasures, and responsible government and sound finances have become a staple of his rhetorical approach. That said, becoming accustomed to normal governance again will take time – for everybody inside and outside of politics.

However, for a certain contingent of Conservative MPs, a “steady as she goes” approach simply may not suffice ahead of what will be one of the trickiest elections for the party in over a decade. They will have been pining for something more to take back to their constituencies today, and even if they can be persuaded to be satisfied with this afternoon’s announcements, they will certainly expect a greater number of rabbits to be conjured from the Chancellor’s hat next year.

If Hunt’s spell of good luck with the economic and fiscal climate continues, however, there does remain some hope on the horizon for the Conservative Party. Rishi Sunak MP has now led Keir Starmer MP in the last three of Savanta’s “Best PM” polls, with the most recent measure showing Sunak at 38% and Starmer at 37%. Cementing this lead is mission-critical for the Prime Minister, as it is this metric that is historically indicative of who will go on to clench victory at an election.

Part of achieving this will be continuing to grapple with divisions in his own party, something this Budget has not entirely helped with. A particular concern for some Conservative MPs has been Sunak and Hunt’s view on corporation tax. Many, including former Prime Ministers Boris Johnson MP and Liz Truss MP have called for the measure, along with wider business taxation, to be cut in an effort to drive productivity and growth.

Indeed, one of Truss’s most loyal supporters, Simon Clarke MP, has warned that Hunt’s increase could have a “chilling effect on the whole economy”. Others, including Priti Patel MP, have warned the Chancellor that the Conservative Party “is nothing if it does not stand for low taxes”.

However, Hunt clearly wants to continue showing a commitment to playing the long game – prioritising caution and stability – whilst also actively rebuffing the wishes of the Conservative Growth Group and other more libertarian factions of the party. Whilst this may help public perceptions of the Budget, the reality is that divided parties struggle to win elections, which only piles further pressure on the Chancellor to find the fiscal headroom to deliver for all corners of his party within the next 12 months.

In a bid to reach out to some of his colleagues, the Chancellor did attempt to mitigate some of the concerns that were raised around corporation tax. He announced that businesses will have full expensing for the next three years, with the intention to make it permanent when conditions allow. However, this is of course significantly less generous than the super-deduction scheme it replaces, which allowed companies to write off 130% of investments against profits.

Among others, the policies the Chancellor announced on childcare, nuclear energy, and getting people back into work have also all proved popular with backbench Conservative MPs, particularly the abolition of the £1 million lifetime allowance on pensions savings – the one and only rabbit we saw today. However, a more fundamental problem for the Prime Minister is that he is operating in a political environment in which he will always struggle to please everybody, as parties become more fragmented and election jitters continue to rise.

What’s more, a competent, responsible administration is the kind of governance the public expects from their politicians, rather than something which they view as worthy of rewarding. And despite tinkering with the arms of government – creating the Department for Science, Innovation and Technology, for instance – Sunak is still yet to present his own vision for where he wants to take Britain in the next five years.

The question that has been posed for some time across the political spectrum, and by plenty of his own colleagues too, is whether or not the Prime Minister has the capacity for setting out such a vision, or whether Hunt’s caution is reflective of Sunak’s own method of governing.

Despite these criticisms, the Conservative Party is undoubtedly on substantially firmer footing than where it found itself several months ago. Indeed, today’s Budget has confirmed that Sunak will meet at least the first three of his five priorities – halving inflation, growing the economy, reducing national debt, cutting NHS waiting lists, and passing new laws to stop small boats.

With a set of promises made and a set of promises kept, with Sunak beginning to open a lead over Starmer on who would make the better Prime Minister, and with the breakthroughs the Government has managed to achieve in the past month, it remains unwise to write Sunak off electorally as we look ahead to 2024. Although with the plethora of challenges that continue to arise on a weekly basis, the path to re-election of course remains an uphill task for the Conservatives.

If today’s steady and sensible approach paves the way for anything, Conservative MPs will be praying that it will lead to a much more exciting set of announcements next year, which they can then take to the country in what will surely be yet another fiercely contested election battle.