Spring Statement 2023: Our Chief Economist’s view

As the economy loses steam, overall we consider the measures announced by the Chancellor should improve demand by lowering individual tax burdens, increasing spending in defence and other areas and allowing more tax benefits for certain sectors and employees. The latter could possibly reduce the skills gap in the UK. Targeted investments in areas outside of London are also very positive towards a more balanced economy and sustainable growth.

In general, the budget is pro-growth and the targeted reliefs should help offset the impact of higher corporate tax rates.  

We are, however, sceptical, about the forecast that inflation will fall below 3% by the end of the year. On the one hand, the Chancellor opts for growth; on the other, he wants to fight inflation. Clearly conflicting targets. The OBR’s inflation forecast is less than half of that expected by the majority of economists. Developed markets as a whole are expected to see year-end inflation above 5% so 2.9% in the UK is ambitious. 

Whilst the OBR may indeed be right.  The UK may avoid a technical recession this year, this is still an optimistic forecast and it is hard to see how increasing demand will help halt price growth.  

An independent Bank of England could, all other things being equal, become more hawkish after this budget statement, in its bid to lower demand and stem inflation so the interest rate rises may yet exceed market expectations.  

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