For weeks before yesterday’s Spring Budget, speculation has centered on what potential policy "rabbit" the chancellor, Jeremy Hunt, would pull from his hat, or at least from his Red Box.
Those waiting for a rabbit moment in his speech yesterday were disappointed. The Budget was much less ambitious than many thought it might be, leading would-be psephologists to predict that it was merely a precursor to a bigger fiscal statement in the Autumn, ahead of a general election in October or November. The chancellor himself noted this Budget is not the last roll of the dice and that an Autumn election remains the "working assumption".
Worsening terms of trade
For trade wonks, the budget speech held little of direct detail on trade policy, except the government’s commitment of £2m to boost global investment and trade opportunities for Northern Ireland.
But the ‘Red Book’ document that supports the Budget and explains all measures in detail, does set out that external shocks that the UK has faced have “led to a worsening in the country’s terms of trade", adding "this reflects the impact of rising imported goods and energy prices".
Despite this, it notes that the economy has performed "better than expected", given these shocks. This is largely because wholesale energy prices have fallen quickly and global supply chain disruption has eased, meaning inflation has decreased more quickly than originally predicted in the Office for Budget Responsibility’s (OBR) November 2023 forecast.
Box 1.A of the Red Book explains this in detail. The key passage reads:
“The terms of trade are measured by the ratio of an economy’s export prices to its import prices. The UK is a net importer of energy and goods, so as global shocks pushed their prices up in recent years, its terms of trade weakened, which contributed to a rise in inflation and slower growth.
In the medium term, high energy prices may reduce the volume of goods and services it is profitable to supply, reducing potential output. The UK’s terms of trade shock over 2021 and 2022 was the largest seen since the 1970s (Chart 1.1, below). Import price growth reached a peak of 15% in Q3 2022. Other European economies experienced a large terms of trade shock. In France and Germany import prices rose by between 15-20% in Q3 2022.”
SME Support
2024 is referred to in the Red Book as being "the year of the SME". To that end, there were a few measures of benefit to SMEs in yesterday’s announcements.
Having called for a rise in the VAT threshold from £85,000 to £100,000 in our representations to Treasury and in our Policies for Progress paper, IOE&IT welcomed the rise to £90,000 but hope the threshold can be raised more in the future, to further incentivize MSMEs to grow turnover, without having to charge customers VAT and face the extra burden of quarterly returns.
SMEs also regularly struggle to access the finance they need to grow and to feel confident to export. The extension of the Recovery Loan Scheme – now renamed the Growth Guarantee Scheme – will help support 11,000 SMEs between 1 July 2024 and 31 March 2026 to access funding.
The scheme offers a 70% government guarantee on loans to SMEs up to £2m in Great Britain and £1m in Northern Ireland. But it is disappointing that more tailored financial incentives for SMEs were not addressed in the Budget, such as tax incentives for SMEs looking to export.
Regional Skills and Investment
Launching the first Investment Zones in the North of England and the Midlands (Liverpool, South Yorkshire, Greater Manchester, the West Midlands and the North East) will take place in April, with a 10-year package of funding benefitting a range of sectors including R&D, business investment, infrastructure, and local skills.
It is hoped the offer of tax reliefs will attract businesses to these areas. The Investment Zones programme has also been increased from five to 10 years in Scotland and Wales.
The Tees Valley Investment Zone was particularly highlighted in the Chancellor’s speech, as it has already been confirmed that it will focus on the digital and creative sectors, with local partners expecting it to leverage £175m in private investment and kickstart support for over 2,000 jobs in the next 10 years. But there are more details yet to be released about the East Midlands and Tees Valley Investment Zones, in particular, as well as the structure of Investment Zones in Wales and Scotland.
However, the wider lack of focus on regional skills in the Budget is disappointing. We know that SMEs need to be able to successfully bridge the skills gap for them to successfully take business beyond our borders. There was an opportunity yesterday for the regional announcements to include specific funding streams for further educational programmes, within regional training clusters, to address skills shortages in key regions. This would have been a sustainable, long-term solution to some key problems focused on the strong basis of educational development.
All in all, this was a Budget where some things that are working well have been extended, but nothing new or adventurous has been explored. All eyes will now be on whether an Autumn Statement will potentially produce some of those long-awaited rabbits.
Grace Thompson is UK public affairs lead at the Institute of Export & International Trade