The UK spring budget – what does it mean for the economy and real estate?

The Chancellor announced a budget where an optimistic economic forecast from the Office for Budget Responsibility (OBR) gave him some room to make additional spending commitments and the odd tax cut. However, the extra spending is phased over several years, and there was a certain amount of fiscal smoke and mirrors to distract attention from tax increases elsewhere.

The OBR are now predicting the UK will avoid a technical recession, with a full year 2023 GDP growth figure of -0.2%. This looks upbeat against the consensus forecast of -0.8%. To be fair on the OBR, most commentators have been upgrading their forecasts for 2023 GDP lately; reflecting better-than-expected data since the 2022 autumn statement. OBR are predicting 1.8% growth for 2024, versus a consensus of 0.7%. The later years in the OBR’s forecast were revised down, hinting at a fiscal reckoning further down the line.

The milder downturn forecast for 2023 and a fall in Gilt yields, from 4.1% in September to 3.3% now, put the Chancellor in a position to announce extra spending. The Energy price cap will remain at £2,500 until June 2023, easing pressure on households who according to the OBR should also see inflation fall markedly this year. Anything that helps mitigate the impact of recent price rises will be welcome, but whether this will be enough to help embattled consumer-facing sectors of the economy remains to be seen.

The budget also had measures to raise workplace participation, including lowering the qualifying age for the 30 hours of free childcare. This offers the prospect of bringing more urgently needed people back into the labour market, as will measures for the disabled and the over 50s. However, the existing childcare scheme has been criticised as being bureaucratic and confusing, so those issues will need to be addressed to achieve the optimum impact.

For businesses, as expected the 130% super deduction for investment is to be replaced by a scheme of full (100%) capital expensing. It is welcome that the impact of the upcoming hike in corporation tax can be partly offset by tax relief on investment. However, given that this is a less generous scheme, one could argue it is a backhanded tax increase. Moreover, the big picture is that corporation tax is going up next month, from its current level of 19% to 25%.

An eye-catching announcement from a property perspective was the proposed 12 investment zones. The examples the Chancellor used to illustrate what is envisioned were Canary Wharf in London and the Liverpool Docks redevelopment. The relevant local authorities will now be asked to propose specific locations, which will ultimately unlock £80 billion in funding. The nature of this sort of programme is that the impact comes over the medium- to long-term, and while there are dazzling examples of success for investment zones, there are other instances where the impact was relatively marginal.

Another major announcement for the regions was the round two funding for the City Region Sustainable Transport Settlements. This will take the projects out to 2032 and release around £8.8 billion of funding to further develop mass transit networks in and around several regional conurbations, which could unlock interesting development opportunities.

On the ESG front, the Climate Change Agreement Scheme, where meeting energy efficiency targets reduces the Climate Levy rate, is to be extended for another two years. Also, there is to be up to £20 billion in funding for climate capture, usage and storage projects until 2030 which the government estimate could generate as many as 20,000 jobs.

Science and technology was another key area in the budget, including a £2.5 billion quantum research programme over ten years, £900 million for an exascale super computer and £100 million for Innovation Accelerators.

From a property perspective, the budget had little to say on many of the key issues facing the sector, such as planning reform, house building and business rates reform. More people returning to the workforce should in theory be positive for property demand, although in a world of greater homeworking it will be harder to quantify the impact. The full capital expensing scheme may encourage more landlords to ‘green’ their buildings in response to new EPC targets and increased tenant demand for sustainable business premises. The levelling up agenda continues, potentially leading to more vibrant regional property markets over the long-term. Also, the government’s R&D push could lead to more demand for life science parks and business space near universities.

The budget took place to the backdrop of three bank failures in the US, which has prompted investor concerns over other banks elsewhere in the world. This is creating significant uncertainty in the global financial markets. Whilst the problems may prove to be specific to the banks involved, the impact on capital markets and the short-term outlook for interest rates has been significant. Presently, macro events and wider sentiment remain the leading influence on real estate investment markets.

Overall, the Chancellor had little financial scope for major changes in either taxation or spending, so he used his speech to set out measures that will advance productivity over the long-term. There was also a restating of the government’s efforts towards levelling up. For real estate, the budget measures may generate demand further down the line, and encourage the ongoing momentum surrounding the ESG agenda, which is becoming the leading influence on the property sector. There was little in the way of direct benefits for real estate, but nor were there any unwelcome shocks.