In association with
Save content
Have you found this content useful? Use the button above to save it to your profile.
Chancellor Hunt on Budget day
Flickr_Zara Farrar/HM Treasury
Chancellor Hunt on Budget day

Declinists wrong, says Hunt – but economy will still shrink


No recession but a significant fall in living standards will make Hunt’s optimism hard for many to swallow.

15th Mar 2023
In association with
Save content
Have you found this content useful? Use the button above to save it to your profile.

“Today, we build for the future with inflation down, debt falling and growth cuts. The declinists are wrong and the optimists are right.” These were the closing words of Chancellor Jeremy Hunt in his Spring Budget.

Whilst Hunt may choose to “reject the narrative of decline”, to use the words of a Treasury press release, and emphasise that the UK will not be in “technical” recession this year, the Office of Budget Responsibility (OBR) has said that it still expects the UK economy to contract this year.

The economy will shrink by 0.2% this year, just not over two consecutive quarters - thereby avoiding the technical definition of recession.

This is a considerable improvement on the 1.4% decline in the economy that the OBR was predicting in November - which the Chancellor says the OBR has put down to “changing international factors” - i.e. falling wholesale energy prices - "and the measures I take".

He added: “Since mid-October, 10-year gilt rates have fallen, debt servicing costs are down, mortgage rates are lower and inflation has peaked. The International Monetary Fund says our approach means the UK economy is on the right track”.

A return to growth is expected in 2024, now at a stronger 1.8% compared to the 1.3% previously predicted.

Inflation down, living standards better but not good

Inflation, which peaked at 11.1% in October - whilst better than it was - remains stubbornly high at 10.1% currently,  but is forecast to fall to 2.9% by the end of 2023 - helped by the government maintaining the energy price guarantee at its current level.

Meanwhile, lower inflation and higher pay growth have seen the OBR revise the 7% fall in living standards that it predicted back in November to 6% - but this still represents the largest two-year fall in living standards since records began in the 1950s.

A brighter near-term picture for the public finances

Helped by the fall in wholesale energy prices, and a lower expected peak in interest rates, public sector borrowing is forecast at £152.4bn in 2022-23 (6.1% of GDP), down 14% from November’s £177bn. The forecast deficit in 2023-24 is cut to £131.6bn from £140bn.

The government’s net debt target is now forecast to be met by a margin of £6.5bn, or 0.2% of GDP, a little down from £9.2bn, or 0.3% of GDP, previously. However, the margin against the deficit target increases to £32.9bn, or 1.3% of GDP, from £18.6bn (0.6%) of GDP.

In a post-Budget presentation, Richard Hughes, chairman of the OBR, said: “Following another large revision to the fiscal outlook – this time a positive one – the main takeaway from this forecast should not be that debt will fall by a small amount in five years’ time. It should be to focus on the continued uncertainty around our economic and fiscal prospects.

“We are still recovering from the once-in-a-century shock of the pandemic while facing an energy crisis on a scale not witnessed for half a century. And the events of the past few days are a reminder that surprises can come from unexpected places. Managing the public finances over the next five years will, I’m sure, be as much about responding to these risks and shocks as it is about delivering the plans that have been announced today.”

New sources of uncertainty 

Issues in the US banking sector present a new source of uncertainty, with economists suggesting that some caution may need to be attached to the OBR’s less downbeat forecasts.

Martin Beck, chief economic advisor to the EY ITEM Club, said: “Well-publicised issues in the US banking sector and a subsequent substantial fall in government borrowing costs and market interest rate expectations came too late for the OBR forecast. 

“The net effect, if those moves had been included, would have been to mechanically improve the fiscal outlook. But the latest market challenges present economic risks and add an extra degree of caution around the OBR’s latest projections.”  

Next week’s interest rate announcement

The Bank of England increased interest rates by 0.5% to 4% at the start of February and the next interest rate announcement is expected to be on Thursday (23 March). 

Falling inflation, along with a slowdown in UK wage growth in the three months to January 2023, reduces pressure on the Bank of England to continue to increase interest rates. 

The OBR confirmed that markets expected the Bank Rate to peak at 4.3% later this year – before falling back to 3% by the end of the forecast period, half a percentage point lower than was expected back in November. 

Thomas Pugh, economist at accountancy firm RSM UK, said: "In theory, today's Budget argues for a bit more tightening by the Bank of England (BoE) at next week's meeting. Further support for businesses and households around energy prices, more defence spending and tax breaks for business investment will boost demand this year. 

“However, the Monetary Policy Committee (MPC) is unlikely to be too concerned about the inflationary impact of these commitments. Lower energy bills will help headline inflation fall and extra defence spending is unlikely to boost demand in the broader economy.

"By far the biggest issue at next week’s MPC meeting will be inflation versus financial stability. We had already thought the chances of a rate hike next week were probably at 50%, but the flare up of risks around Credit Suisse today and associated moves in financial market makes that probability even smaller.”

PracticeWEB 2023 Budget Report Covers


Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.