Summary of the Spring Budget

9th Apr 2023

It has felt like a game of musical chairs at the treasury recently. Jeremy Hunt, complete with his red box, delivered his budget on March 15th holding the esteemed position as the fourth Chancellor of the Exchequer since the start of 2022. For context, between 1991 and 2007 only three people held the much-coveted office.

Inflation

Inflation, so often the thorn in the economy’s side, is expected to fall to 2.9% by the end of the year from a high of 10.7%, despite a bump in the road in its March figures. High inflation makes most people poorer as evidenced by the sharp price rises of everything from Lurpak to Liebfraumilch over the past twelve months. The Bank of England’s inflationary target is 2% and SWAPS, the rate at which fixed price mortgages are based on, have reacted kindly to this news and the prediction that the UK should avoid a recession.

Economic Growth

Following gloomy predictions in the autumn statement, there was positive news on economic growth. Although the economy is expected to contract by 0.2% this year, a recession should be avoided, something that looked inevitable five months ago. Growth is expected to return to 1.8% next year, 2.5% in 2025 and 2.1% in 2026. These figures should be caveated as they change frequently and there is the small matter of a General Election toward the end of next year.

Energy Price Cap

For all households, the Energy Price Cap will continue until the end of June at £2,500, by which point independent forecasters seem to agree that the cost of energy will continue to fall. Lenders consider living costs for all households in their calculation on the amount of borrowing and further falls in the cost of energy should ensure a more sympathetic calculation in the coming months.

Childcare

Childcare, a whopping expense for families up and down the land, is set to be overhauled. With parents of two-year-olds able to access fifteen hours free childcare from April 2024, those with children aged nine months to two years able to access the same deal from September 2024, and all those with children under five eligible for thirty hours free childcare from 2025, this was a welcome announcement for families. Free childcare is an enabler to allow both parents to work and, in theory, make them better off. Thus, it enables borrowing capability to increase. To illustrate this, the below table shows a typical family’s maximum borrowing with one child under 2 and in receipt of child benefit (which many lenders consider as income for affordability calculations), earning the average salary of £30,576 according to the ONS in 2022 [1] and spending £644 per month on childcare [2] with a major high street bank over a 25-year period: [3]

Scenario Maximum Borrowing

1. Two adults, one working no childcare costs £89,300
2. Two adults, both working with one childcare cost £261,200
3. 2 adults, both working, no childcare costs £308,300

The contrast in numbers is vast and shows what a large difference both childcare and working have for a family’s ability to borrow and the proposal was welcomed from throughout the political arena.

Pensions

The amount of pension savings a worker can have before they pay tax (currently £1.07m) has been abolished, with the tax-free annual allowance for a pension pot set to rise from £40,000 to £60,000, following a nine-year squeeze. Some mortgage lenders will use the size of a pension pot, whether or not it is being drawn and base borrowing on this figure, incidentally. In other measures, fuel duty was frozen and the 5p cut extended for another year, corporation tax for companies with profits in excess of £250,000 was increased from 19% to 25% and tax breaks and other benefits were announced for 12 investment zones throughout the UK with Rochdale and Redcar amongst them. New alcohol reliefs were announced for pubs and bars and £63m was announced to help leisure centres heat their swimming pools.

Property and Housing Market

By the time Mr Hunt had completed his sixty minutes at the despatch box, there was no further direct help for property related activities, aside from a two-month hiatus on Help to Buy. Minimal support for those looking to get on the property ladder, no mention of interest rate relief which would benefit landlords and tenants alike and no commitment to expand the housing stock, a longstanding underachievement in Britain.

The latter point is the cornerstone of a sound housing market. London is particularly fractured. A first-time-buyer in the capital would have required an income of £64,010 in 2019 on average, with a 10% deposit. That figure now stands at £97,308, or a 34% pay rise. There are numerous other statistics which make the problem worse. One forecaster last week said there will be a shortfall of over 110,000 rental homes by 2030 and with rents rising 13.8% in a year, surely this budget deserved something more than airbrushing a problem as if it doesn’t exist.[4]

Landlords, faced with taxation changes, energy performance (which seems to be constantly put back on the legislative agenda leaving further uncertainty), affordability constraints and now corporation tax changes received no good news either. Many landlords frequently say to me that they don’t want to put their rent up as they have such good tenants, but the demands from lenders on the rental income required to afford their existing arrangements leave them with no choice. Less landlords mean less rented homes, and this increases supply and demand issues. In other words, rents will continue to rise unless those in power exercise some joined up thinking.

Whatever your opinion on the budget of 2023, it is likely to influence your finances for the next few years.

Your home may be repossessed if you do not keep up repayments on your mortgage.

[1] www.ons.gov.uk
[2] www.daynurseries.co.uk
[3] NatWest affordability calculator
[4] www.standard.co.uk