Budget 2023: The half-glass economy

You can raise a pint to the chancellor, for freezing duty on draught beer in a pub.

Or you can drown your sorrows with a dram, as Jeremy Hunt pushes up duty on whisky by 10%.

His Budget sought to present the British economy as a glass that’s half full rather than half empty.

After a grim few months for the Conservative government at the end of last year, Jeremy Hunt wanted to shift from crisis management to the front foot.

But if you look at the state of the economy now, it’s not hard to see the glass as half empty.

Living standards are dropping by 6% over this year and next financial year, says the Office for Budget Responsibility (OBR) – only slightly less bad than its autumn forecast, but still the biggest fall since the 1950s when anyone started counting.

Recession may be avoided during 2023, but the OBR is still forecasting the UK economy will contract slightly. Subsequent years are forecast to have lower growth than previously forecast.

Much of the Budget was about measures to boost growth, including an expansion of the pool of labour available to recruiters, and a big tax break for business investment helping to offset the sharp increase in the headline corporation tax rate.

That is for a limited time only, and the OBR thinks it will probably only succeed in bringing investment forward that would have happened anyway.

Biden vs Brussels

That growth priority was only one part of what’s required to understand this Budget. Another part, that was wholly absent from the statement, was the international context.

Economic competition with China is becoming more fraught. And post-Brexit Britain is at risk of being squeezed between policies set in the United States and the European Union.

These investment policies, particularly for technology firms and green energy, are up against a vast splurge of US dollars being funnelled through the US Inflation Reduction Act.

President Biden persuaded Congress last year to back the plan with $370bn in tax breaks, loans and grants to fund a transition to a greener economy, as well as one less dependent on Chinese imports.

The condition is that manufacturers of green goods and equipment, such as battery-powered cars, have to source most of their inputs and do the final assembly in the US.

That has big investors looking to shift into the US, notably in the auto industry as it makes the transition to battery-powered cars and in wind turbine manufacture. Green finance, in search of attractive projects, is skewing in America’s direction.

The European Commission is alert to the risk, and trying to herd its 27 members into a response.

If they can agree, that is likely to involve a counter-punch to the US in allowing industry much higher levels of targeted state aid than the EU has previously allowed. So far in the energy crisis, much of that permission has been given to firms in France and Germany, which is why smaller states are unhappy about this.

Where the UK sits between these two economic superpowers is only slightly less unclear following Hunt’s Budget.

His new incentive for business to invest is a start, but lacks long-term appeal for those who need to plan and to make the business case to build up capacity.

The £20bn to incentivise green energy and energy security over two decades will help. It’s targeted at technologies where Britain is judged to have the best opportunities – the frequently stalled development of carbon capture and storage, as well as new generation nuclear power.

This is seen as also making a priority of the regulation and signalling of priorities, rather than about clobbering the challenge with big subsidies.

The Scottish Renewables trade group says it has been “short-changed” by the lack of strategy, while international competition hots up.

“Other places in the world will benefit from the unparalleled economic and environmental benefits that clean energy investment promises to deliver and the UK needs to match these incentives,” says chief executive Claire Mack.

That reluctance to engage in this international battle to dominate the green industry revolution may be partly due to the Conservative Party’s mistrust of state intervention.

It may also be because Britain lacks the financial and manufacturing firepower to compete, and may now have to focus its efforts in a limited number of sectors.
Source: BBC