Spring Budget 2023: City academics react to Chancellor's statement

On Wednesday 15 March, Jeremy Hunt, Chancellor of the Exchequer delivered his 2023 Spring Budget. Academic experts from City, University of London have been giving their reaction to how Mr Hunt's statement will affect people and businesses of the UK.

Delivering on promises

Professor Steve Schifferes, Honorary Visiting Fellow in the Department of International Politics, wrote for The Conversation earlier this week and said the Budget was always likely to outline how the Government intends to meet the Prime Minister's five recent pledges: halving inflation this year, growing the economy, reducing national debt, cutting NHS waiting lists and passing laws to prevent migrant boat crossings over the Channel.

Workers and businesses are not producing as much as they could. UK productivity has fallen behind many competitors, and solving this problem is the key to stronger and sustained economic growth, leading to workers receiving higher pay.

Expansion of childcare support for one and two-year-olds

In an attempt to help young parents return to the workplace, Mr Hunt announced a boost to Government funding for childcare.

Dr Lauren McCarthy, Senior Lecturer in Corporate Social Responsibility at Bayes Business School (formerly Cass) said:

“Over previous weeks both the Conservatives and Labour have been vying for voters over proposed plans for more childcare support.

"The UK has the third highest childcare costs in the world, with no state support at all until children are three years old. Recent research shows that three-quarters of women with children under five say it makes no sense for them to work due to the spiralling costs of putting their children into nurseries or using childminders.

"We are seeing increasing numbers of women leaving the workforce as a result.

Childcare is both a feminist and economic issue – it’s a no-brainer for any government to tackle rising childcare costs and support parents and carers into work.

Third sector support in suicide prevention

The Government has pledged £10 million of funding to charities doing work in suicide prevention. The Violence and Society Centre's Sally McManus, Senior Lecturer in Health in the School of Health & Psychological Sciences, and Dr Elizabeth Cook, Senior Lecturer in the School of Policy and Global Affairs, supported the measures but said risk factors shouldn't be treated alike:

"The funding announced for third sector organisations to support people in suicidal distress is welcome, but it needs to recognise that the risk factors are diverse and distributed unevenly across society.

"We know that women are at higher risk of intimate partner violence-related (IPV) suicidality (suicidal thoughts and suicidal attempts) and that multiple, systemic disadvantages exacerbate this (for example, women living in poverty).

It is important that the criteria for being eligible to access such funding is also open to specialist support services working with groups at higher risk of suicidality, such as victims of domestic violence and abuse.

Pensions savings

With the Government announcing a rise in the amount of pensions savings people can acrrue before additional tax, Andrew Clare, Professor of Asset Management at Bayes Business School, said the rise would be directly beneficial to only a small number of people, but current limits needed to be changed.

Professor Clare said:

"The current limit is so punitive that doctors and other health professionals that we all rely on, are withdrawing their labour.

"At a time when the health service is under such pressure, anything that can reduce this pressure should be welcomed.

"More generally, a tax system should not create a situation where people are better off not working. This country has enough problems generating growth already: the tax system should not be one of these problems.”

Dr Russell Gerrard, Associate Professor of Statistics at Bayes Business School said it is only a matter of time before the UK pension age rises again:

“There is already a plan to raise the qualifying age to 68, though not until the 2040s, although this may be brought forward.

The UK already has one of the highest pension ages in Europe, but the direction of travel across the board is for pension ages to increase, so it’s bound to happen eventually. It’s a question of when, not if.

Les Mayhew, Professor of Statistics at Bayes Business School, said:

“I welcome changes to the pensions lifetime allowance which put a cap on how much pension people could accumulate before being hit by punitive taxes.

"The life-time allowance creates huge disincentives to those who wanted to work longer for longer but were financially disadvantaged, having done the right thing by putting money aside for their retirement.  

“The immediate effect is that it should increase the numbers of older people in work, especially in skilled areas where there are shortages such as doctors. Even better would be if people that had already paid this tax – in some cases tens of thousands of pounds – could now claim it back.

"However, it will not cushion the blow to those expecting rises in state pension age to 68 but who have not saved enough for their retirement.”

Corporation tax rise

The Government has also announced a rise in corporation tax, although only a small number of businesses will pay the 25 per cent rate - up from 19 per cent.

Meziane Lasfer, Professor in Finance at Bayes Business School, said:

“I think that this is going to motivate more companies to fund themselves with more debt to gain from tax shields.

"This view is also motivated by the decrease in the amount of capital gains and dividend that is tax free. From April, the threshold above which investors pay tax on capital gains will fall from £12,300 to £6,000 and then again to £3,000 in April 2024.

"The threshold for taxing dividend income will drop from £2,000 to £1,000 in April, and to £500 in April 2024. This will reduce the propensity of firms to finance with equity.”

Michael Ben-Gad, Professor in Economics in City's School of Policy and Global Affairs, said:

“Without an effort to increase immigration, preferably by skilled young people (regrettably, immigration was not mentioned), the population will continue to age – placing even more demands on both the National Health Service and public pensions that are still protected by the triple lock. The tax burden must therefore rise.

“Should that tax burden fall more heavily on wage income or income derived from capital, though?

“The latter is comprised of not just corporation tax, but the entire burden of taxation on capital from corporation as well as income tax after adjusting for depreciation allowances.

There are lots of reasons for the UK’s low productivity and dismal growth; lack of investment is but one element. The UK must compete for investment with peer economies - the rise in corporation tax will only make this harder.

In summary

In summarising the Budget, Professor Schifferes said it does little to tackle to long-term problems facing the UK economy or reverse the fall in living standards:

"Despite a modest improvement in the near-term economic forecast, the Office for Budgetary Responsibility (OBR) says that real disposable household income will be six per cent lower in 2023-4 than the two years previous, which is the largest fall since records began.

"The growth forecast, which is still projecting a small drop in GDP in 2024, also suggests that growth will be slower in later years. Individuals will then face the highest tax burden as a percent of GDP in the post-war era.

"The OBR is sceptical of how much the Government’s measures will boost the workforce (which it estimates will only increase this by 110,000) and points out that higher-than-expected immigration will be more important. The OBR also doubts that temporary changes in investment rules will boost long-term investment and increase productivity; it just shifts investments into the earlier years, before falling back.

"Along with the already-announced plans for sharp reduction in government spending from 2024-25, this would create difficulties for any incoming government.

"Finally, the Chancellor’s increased spending, especially on childcare, gives him little headroom either for tax cuts or pay increases for public sector workers next year as the General Election looms."