UK budget 2023: Market reaction tepid to fireworks-free announcements

Jeremy Hunt delivered his first budget, with areas for insurers and investors to look at but little detail on inflation and cost-of-living issues.

UK budget day saw few surprises for insurers looking to ease concerns around macroeconomic issues.

Jeremy Hunt, Chancellor of the Exchequer, has outlined the UK government’s annual budget today.

This was Hunt’s first budget since he took over after previous Chancellor Kwasi Kwarteng was booted out of office following the disastrous ‘mini-budget’ in autumn 2022. The continued pressures around inflation and interest rate rises globally has dominated financial news for several months, however these key issues were largely missing from Hunt's announcement. For investment teams at insurance firms, this fireworks-free announcement means little surprises and much of the same.

Key takeaways

Hunt’s budget largely focused on domestic affairs: cheaper childcare for working parents, benefit reform, and capping energy bills. However, several financial services elements were involved.

There was tinkering with pension tax free allowances, which was primarily aimed at getting older people who had left the workforce during COVID-19 lockdowns back into employment to ease labour shortages.

Corporation tax was also set to rise to 25% from 19%. Alongside this, Hunt announced a new £9 billion policy centred around “full capital expensing” for the next three years, which will allow companies to write off all investment against their tax bills.

The hope from Hunt – and the Conservative party more broadly, including Prime minster Rishi Sunak – was to appease business with the investing programme, meaning that if companies invest in the UK, they will receive tax rebates. It is unclear if this aim will significantly effect insurance investments moving forward, but investment teams at insurance firms should take note. 

“After fireworks last Autumn, today’s spring budget was, as expected,
bit of a damp squib for markets.”

The change comes just weeks after the Bank of England (BoE) warned that changes to Solvency II capital amounts – which the government hoped would play a part in funding its flagship Levelling Up promises – could increase risk of bankruptcies to life insurers.

The budget was announced as, once again, Europe’s banking sector took a hit from the Credit Suisse wrangle. Hunt will also hope for a smooth reaction to to the budget after the chaos and resentment caused in financial markets from last year’s mini-budget as well as his party being far behind the opposition in polls, with few signs that they are trusted on the economy.

"Jeremy Hunt took pains to communicate a pro-growth stance ahead of an election year while appeasing the fiscal – and inflation – hawks by shying away from direct large-scale stimulus," said Konstantinos Venetis, Director, Global Macro at TS Lombard. "Measures aimed at propping up the supply side (corporate tax breaks; encouraging higher labour participation; opening the job market to more foreign workers) are welcome and – at least in principle – offset the marginal inflationary effect of the hoped-for boost to GDP growth."

Many commenters also referred to the budget as being expectedly lacklustre: “After fireworks last Autumn, today’s spring budget was, as expected, bit of a damp squib for markets,” said Neil Mehta, Portfolio Manager at RBC BlueBay Asset Management. “The pound edged higher as a frugal chancellor prioritised reforms to ease supply side pressure on the labour market, while also extending the energy price guarantee – policies hoping to aid disinflation later this year.”

Wider economic context

Whilst no fireworks per se, parts of the budget could still be controversial to the public and to businesses – with fears it’ll give to the rich at the expense of lower income workers to aid growth. “Living standards are expected to fall by 6% over this fiscal year and next as inflation outstrips income growth," said the Office for Budget Responsibility in its response to the budget. “This is less than the 7% fall we expected in November but still the largest two-year fall since ONS records began in the 1950s.”

“It is crucial we create an environment that boosts our global competitiveness
and enables the UK to become a technology superpower.”

This was a similar accusation against the September mini-budget.

However, some in the investment sector did give tacit approval to the budget. “We support the Chancellor’s aim to ensure the UK is Europe’s most dynamic economy and share his commitment to drive forward innovation in the UK,” said Karen Northey, Director of Corporate Affairs, at the Investment Association (IA). “It is crucial we create an environment that boosts our global competitiveness and enables the UK to become a technology superpower.”

Northey said the measures announced – such as the new full capital expensing policy and the enhanced research and development credit – “will do exactly this”, whilst simultaneously creating the best possible place for companies to develop. Northey added: “this will benefit the wider economy, as well as ensuring the UK remains a centre for investment management.”

This is key as the UK is the second largest investment management centre in the world – after the US – and manages 37% of all assets managed in Europe. 

Others highlighted the aims of the budget around inflation, a point that remains particularly salient for insurance investment teams. “We think ambitious forecasts on inflation and growth may prove to be challenging, containing any fiscal room for tax cuts later this year and keeping inflation persistently high,” said Mehta. “With a Bank of England reluctant to do much more, we think the [British pound] has further to fall, while long end yields will stay elevated.” 

“Ensuring the competitiveness of the UK regulatory regime is a key
 priority for the investment management industry."

The IA also welcomed the abolishment of the lifetime allowance and the increase of the pensions annual allowance. “This removes unnecessary complexity and creates an unambiguous incentive for people to save for retirement and helps them achieve their long-term savings goals. It also has the potential to provide additional funds for investment in UK businesses and infrastructure through DC pension schemes," it said.

“Ensuring the competitiveness of the UK regulatory regime is a key priority for the investment management industry, and we welcome the acknowledgment by the Chancellor of the importance of regulators' behaviours in promoting growth," it continued.

Venetis added that he felt many of these initiatives were nonetheless unlikely to move the needle for the UK economy over the coming quarters – and should be taken with a grain of salt. "A sustainable increase in business capex hinges on confidence in domestic growth prospects fuelling optimism on the profit outlook. With UK household real incomes under pressure for the foreseeable future and the risk of a US recession looming over the global macro outlook, this still looks like a tall order," he said.