PA Consulting comments on the Spring budget

Our experts comment on the Chancellor's Spring Budget and the impact this will have in a number of key areas.

Jonathan Gillham, chief economist at PA Consulting, says:

The OBR’s forecast suggests that inflation will roughly halve over the next 12 months and the economy will narrowly avoid recession. This is a considerably more optimistic position from that set out in November 2022. Overall, it’s given the Chancellor roughly an extra £25 billion to play with through reduced borrowing.

The Chancellor has spent around two-thirds of his fiscal windfall and emphasised the need for greater fiscal buffers given the mounting scale of global economic risks. Attempts to boost investment should see a gain to GDP of around 0.2% by 2027-2028 and policies to encourage workers back into the labour market should boost labour supply by around 110,000 workers over the same period.

While we had not expected announcements on public sector pay in this Budget – it would be unusual to do so while negotiations are continuing – markets will be closely watching the Government’s strategy. In light of this budget, fiscal headroom is still minimal and there is still considerable economic risk from the war in Ukraine and supply-side bottlenecks. A responsible fiscal plan to address these issues remains critical.

Shaun Delaney, global head of public sector at PA Consulting, says:

The government has clearly set out its intent to make change happen. The key question now is how quickly we can put this into reality. The challenge ahead is to implement the budget initiatives at pace, so that the benefits and value will be realised by communities across the UK. To drive early benefits from these initiatives the government should now focus on:

Delivering at pace. By relooking at the way the government can decrease the time to delivery and remove some of the more bureaucratic steps that can slow down effective initiatives becoming a reality. One solution is to empower local bodies to make quicker decisions on the implementation of the new investment zone policy.

Coherence across the policy initiatives. The government needs to consider all areas of activity to identify where one policy can positively reinforce and amplify the benefits of another. The government could, for example, consider how it can combine workforce reform agenda within some of the business support initiatives.

Adopting an R&D mindset to delivery of the budget announcements. The government needs to be bold in assessing what is working, and what isn’t. It needs to think about how it can learn quickly and take tough decisions about those initiatives that it needs to accelerate because they are showing early benefit, as well as closing down those initiatives that are failing to realise on the potential

Anthony Legg, energy expert at PA Consulting, says:

Much needed impetus for Carbon capture, utilisation and storage (CCUS). The government’s announcement of £20bn funding for the CCUS sector is very welcome, providing some much needed impetus to the sector to help it compete for investment with the US (which has been stimulated significantly by the Inflation Reduction Act measures). This should provide a clearer indication of HMG’s budget envelope for support of transport and storage networks, and associated CO2 emitters, across the East Coast Cluster and Liverpool Bay Cluster. However positive this is, more details are required around access to the funds in order for it to move the needle on the government’s climate commitments.

A boost for nuclear. The government’s announcement of the launch of Great British Nuclear (GBN), supporting the development of Small Modular Reactor technology (SMRs) and the announcement that nuclear will be re-classified as environmentally sustainable in the green taxonomy, are a welcome boost to the nuclear sector. GBN will likely play a key role in delivering the 24GW commitment in the energy security strategy. For SMRs, once the preferred technology is identified, it is vital that swift action is taken to progress forward into delivery and implementation.

The government’s strong support for SMRs is a real acceleration of ambition in this sub-sector. However, the announcement that GBN will focus on SMRs in preference to gigascale projects in the near term will warrant further clarification from government. Does this signal a temporary pause in exploring gigascale projects, at what might be a natural pause in the industry cycle - with Hinkley Point C and Sizewell C making progress, and the recent announcement by EdF that it will extend the life of some of its existing nuclear plants? Or, does it signal something more fundamental about the government’s longer term plans?

Some major necessary investments are missing to help deliver the 2035 and 2050 targets. Taken together this a welcome set of announcements, with some real tangible progress for CCUS and nuclear, but there don’t appear to have been any new announcements in the budget for sectors like green hydrogen and offshore wind, or for core network infrastructure (aside from the refresh of the national policy statements), major investments in all of which are needed to help deliver the 2035 and 2050 targets.

The energy trilemma remains unaddressed. While the household energy subsidy extension by three months is providing much needed support to people, we still need to address the energy trilemma across the UK if we want to remove the need for support going forward. CCUS funding and GBN are both a step in the right direction, but more is needed.

Stephen Farrington-Bell, health economics expert at PA Consulting, says:

Getting the economy growing at pace. A suite of measures were announced to support the re-entry of 2.5 million people that are currently in ill health or disabled back into work. The health care system and NHS will play a significant role in providing the mental health services, the musculoskeletal services, and additional healthcare services the support they need to get individuals back into work.

Changes to pension rules will make a positive impact to the make-up of the workforce. Both the annual allowance and lifetime cap will be abolished. Pension rules have been affecting senior NHS staff, particularly consultants, leading to people retiring early and declining extra work. Lifting these restrictions will help incentivise senior clinicians back into the NHS and alleviate some of the workforce issues that the system is currently facing.

New drug licensing will help accelerate new drugs and treatments. Accelerating approval for drugs is a welcome step in attracting inward life sciences investment and innovative clinical trials, supporting the pipeline of new drugs and treatments. Ultimately, this will mean quicker access to new drugs and treatments for British patients.

Elaine Whyte, defence expert at PA Consulting, says:

The refreshed Integrated Review (IR) is both an opportunity and a challenge for defence enterprise. For the full value of this investment to be unlocked, there are three key things that need to now happen:

A portfolio approach is needed to enable an enduring funding and approvals approach. This requires not just a change in processes but also a change to culture and behaviours so that the organisation becomes comfortable with undefined requirements.

Having this enduring approach gives a clearer demand signal to industry that allows them to confidently invest in skills and R&D. To meet today’s increase in demand, industry needs to increase its capacity to build and deliver capability.

To integrate capability into the Enterprise at pace, communication channels need to be shortened and the purpose needs to be understood. All key players need to work together to navigate evolving requirements and be realistic about delivery. For example the UK Government Ventilator Challenge saw all key players in it together, united on a clear purpose. This allowed for rapid development time and ensured everyone in the UK who needed a ventilator, got one during the coronavirus pandemic.