What we’ll see in Jeremy Hunt’s Spring Statement

Sources: HM Treasury, Ofgem, Cornwall Insight, NatWest Markets

Support for businesses will become more targeted under the Energy Bills Discount Scheme (EBDS), which comes into effect on April 1. However, given the trajectory of wholesale prices, it seems unlikely that the Chancellor will offer businesses further help with energy costs.

Fuel duty freeze: positive for fleets

The fuel duty – which hasn’t been raised since 2011 – is supposed to rise by retail price index (RPI) inflation in April, which would add 7p to the price of a litre of fuel. 

A temporary 5p fuel duty cut, announced in March 2022, is also due to expire at the end of March. Combined, these would trigger a 23% increase in fuel prices, or roughly 12p per litre. 

To avoid this steep increase, the Chancellor is likely to freeze fuel duty for 12 months. Mr Hunt is reportedly also keen to continue the 5p cut, as long inflation is falling. This would keep fuel prices steady at current levels.

Corporations tax: unlikely planned rises will be scrapped, but targeted reforms are a possibility 

The Chancellor may, however, offer a longer-term commitment to bringing rates down after a period of growth. He may also introduce targeted tax incentives and measures to boost investment. 

One possibility is that Mr Hunt may allow more types of UK-based firms to use investment zones – sites that benefit from tax incentives and less red tape – to lower their blended tax rates and boost regional investment. 

He may also look to replace the temporary tax relief on investments – the so-called “super deduction”, which lets businesses to cut their tax bill by 25p for every £1 that they invest in certain kinds of equipment – with a more permanent expensing framework, one that could allow certain equipment investments to be deducted directly from profits.

The economic outlook: a shorter, shallower downturn this year, but medium-term headwinds are afoot

As we’ve written recently, the near-term economic outlook has broadly improved: Gross Domestic Product (GDP) performed better than expected in Q4 2022, avoiding a recession; wholesale gas prices have plunged; and business surveys point to greater optimism about the months ahead.

What does all this mean for the economy? The Office for Budget Responsibility’s (OBR) Autumn forecast estimated a 1.4% drop in GDP this year. An upward revision to GDP, to reflect the recent improvement in the outlook, is almost certain. 

The medium-term outlook, however, looks less promising. In February, the Bank of England downgraded its medium-term forecasts due to a pessimistic view of the UK economy’s potential to grow without generating inflation. We think the OBR will likely follow suit and trim its medium-term growth forecasts from next year onward.

Medium-term economic growth (GDP %)

Sources: OBR, NatWest Markets

Government finances: the public purse is in better shape, but government borrowing will remain high – putting upward pressure on bond yields 

Government finances are looking stronger than anticipated, with a larger tax haul (around 4.5% versus November estimates) and lower spending (around 0.5%) the primary drivers. 

This should reduce public sector borrowing in the 2023-24 fiscal year. The Central Government Net Cash Requirement (CGNCR) – the borrowing aggregate which informs gilt issuance – could decline by around £20 billion versus November estimates. Public sector net borrowing (PSNB-ex), the metric that informs fiscal policy, could undershoot its previous vintage by as much as £28 billion.

But with net-gilt issuance (issuance of new gilts minus redemptions) in 2023-24 estimated at around £190 billion– more than triple the annual average in the decade prior – government borrowing remains unambiguously high. 

All of this supply comes against a backdrop of very low demand from global investors. For gilts in particular, demand from the major holders (overseas investors and liability-driven investors, or LDI) has not materialised this year, and we don’t expect it to in a meaningful way any time soon. 

This supply-demand imbalance should weigh on gilts, with yields on 10-year notes now likely to reach 4.3% by year-end in our view. Rising yields will of course pass through to corporate bond markets, meaning higher borrowing costs for issuers of sterling-denominated securities.