Tel. +44 (0)20 7287 4414
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The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.
The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.

Bruges Group Blog

Spearheading the intellectual battle against the EU. And for new thinking in international affairs.

Budget 2023: Trainlines for Growth?


In days past, the Budget has been slimmed down into a question of winners and losers, of pub-goers versus the public sector, of the rich versus the poor, but that merely masks the reality of a minimalist budget. Designed for small wins but to present an overall stability - one not to rock the boat so much so as to calm the once volatile markets.

In the budget, there's an improved fiscal outlook, borrowing is down (£152.4bn from £170bn), and lower borrowing for 2027-2028 is estimated for the coming forecast.

There is encouraging news in the budget, despite talk of a minimalist budget, these new measures are far from tramlines to nowhere.

Talk of the increased rate of Corporation Tax, a foreseen change since 2021, has naturally proved a hard pill to swallow for the multinationals in the UK. Firms like AstraZeneca with the ability to affect the lives and employment of Britons, with the power to contribute to levelling up the whole nation, have decided to build plants elsewhere. There is, however, a caveat to this in this Budget; the Chancellor announced that, in practice, "only 10% of companies will pay the full 25% rate" and that "[the UK] will have the lowest headline rate in the G7". The newly announced policy of full expensing gives a 100% tax deduction for investment in machinery, IT equipment, and machinery could prove to be catnip for overseas manufacturers and multinationals looking to bring manufacturing to the UK. While, in my view, a reinvigorated manufacturing sector deserves a more radical plan of action, a tax deduction like this will prove vital in the rejuvenation of the manufacturing sector in the UK. This policy will last till 2026 - put the hope there is that a more permanent tax relief could be implemented.

Still, a Corporation Tax rise sends a signal to business that enhancing FDI here in the UK isn't welcome. In practice, the temporary expensing policy may look attractive on appearance, but it runs the risk of having little to no impact. Unless lost growth is what the government seeks, then this policy should be properly reformed.

Citing the past successes of Canary Wharf and Liverpool Docks as regeneration projects that renewed the strength and vitality of both the London Docklands and Docks in Liverpool such as the Royal Albert Dock, Hunt also announced 12 new Investment Zones - the aim, to create new 'innovation clusters' through a partnership with a local university/research institute and the local government. The hope here would be to both bring in more R&D into the UK and continue levelling up across the UK. Such innovation clusters would be eligible for £80 million in support. While this is a welcome move that can help spur on innovation in the UK, it is a far cry to the rapid economic development that would be needed to bring R&D and high-technology sectors to the UK. In South Korea, their Korea Free Economic Zones (KFEZs) seeks to establish or consolidate Korea's position in R&D and manufacturing - this led to an uptick of FDI by 43% in 2021. What must also be noted is the risk of such high-profile redevelopment project becoming White Elephants. Canary Wharf, now a success story and home to the London headquarters of HSBC and JPMorgan, was deemed a White Elephant by the late 80s, only making a comeback around the mid-to-late 90s. At the time, the unfavourable market conditions, delays in construction of the new Tube line, and the unwillingness of some to relocate from the traditional City, would lead to the bankruptcy of the property developer, Olympia & York. Let us take those risks in mind as Investment Zones are brought in.

One new headline Budget measure is abolition of the lifetime allowance of £1.073m and the increase in the pensions annual tax-free allowance. It's targeted at addressing the shortage of doctors, particularly those senior doctors leaving for tax reasons. The Chancellor insists this measure will keep more doctors in the NHS - a move welcomed by the doctors' union the British Medical Association. The tax-free pensions allowance for pensions above £1m will be increased from £40,000 to £60,000, allowing those savers to add more to their pensions pot. Moreover, the lifetime allowance, which was the cap on how much savers could benefit from tax advantages in their pension pot, has been lifted - a means of incentivising senior doctors to continue working. We welcome this decision to curb the medical shortages, which signify the importance of homegrown solutions. Solving the shortage of doctors starts at home. Far from merely benefitting the rich as Labour claims it will, it makes it easier for those with years of NHS experience under their belt to put more money in their pension pot and keep working and earning. The hope would be that, down the line, new ways of incentivising more British students to join the medical profession will be needed to solve short term crises.

The new reform to R&D tax relief will also come as hard to swallow for smaller tech firms, while large larger tech firms stand to benefit. For firms with less than 500 staff (SMEs), the 130% tax deduction rate for profitable SMEs has been reduced to 86%, and the surrendable loss rates will be reduced from 14.5% to 10%. This change for smaller firms is to address the "number of erroneous and fraudulent R&D tax relief claims". For larger firms, with less than 500 staff but a higher turnover than SMEs, they fall under the R&D Expenditure Credit (RDEC). Firms under the RDEC stand to benefit the most, with tax credit increasing from 13% to 20%.

It is free childcare that is garnering the most attention, and the most controversy. For some, it is an unnecessary and undue takeover of parental responsibilities by the state and undermines the unique bond between parents and their children. While understandable, there can be no doubt that leaving the options open for pre-school children to be able to be cared for by childminders while their parents work is an excellent step forward in getting more people into the economy. Childcare cannot remain a luxury as long as the economy needs people, and widening access is the most sensible step forward. Far from taking away or removing the unique responsibilities of parenting, free childcare widens access to those who need it most and is a sensible decision: it encourages having children to solve Britain's demographic issue, reduces the burden of raising children, and encourages the enhancement of the family unit.

Though this budget is no radical rethink of the economy, it is a budget for stability, and one that can lay the brickwork for growth.

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