On 24 October 2022 the Prime Minister, Rishi Sunak, acknowledged the “profound economic challenge” that is faced by the U.K. Today the Chancellor, Jeremy Hunt, announced the Treasury’s fiscal plan (the “Statement”) which seeks to meet that challenge.
The Statement is a response, in part, to the world-wide inflationary and interest pressures arising from a culmination of recent unexpected macro-level events including the war in Ukraine and the pandemic. It is, of course, also a necessary reaction to the previous ‘mini-budget’ and the resulting market reaction that saw sterling plummet to a thirty-seven-year low.
In a bid to calm turbulent markets and to reduce the impact of climbing interest rates on homeowners, the chairperson of Parliament’s Treasury Select Committee had demanded that the budget take place in advance of the Bank of England’s interest rates decision on 3 November 2022. However, the changing of the guard at 10 Downing Street necessitated a delay to the announcement and the 3% base rate loomed large in the background of today’s Statement.
The “difficult decisions” that form the basis of today’s plan have been trailed by the Chancellor in the run-up and therefore, the tone of the announcements are not a surprise. In his speech on 17 October 2022, the Chancellor made it clear that the central responsibility of Government was “to do what is necessary for economic stability” - in fact the word stability appeared no less than five times in the relatively concise speech.
The Government’s fiscal rules and a forecast from the Office of Budget Responsibility (OBR) have also been published today. The Chancellor has announced he will form a new Economic Advisory Council to advise on economic policy alongside and in addition to the OBR and the Bank of England to bolster the independent advice available to the Treasury. In a further signal to boost confidence in the markets, the Chancellor confirmed his “whole-hearted support” for the Bank of England and that he would not seek to change its remit.
The thrust of the Statement, as expected, was to seek to minimise further the hikes in interest rates and to curb inflation by supporting the Bank of England’s “mission to defeat inflation”. These principles are key to the economic success of the country from a macro perspective but there are direct impacts on the real estate market at a granular level. For example, seeking to minimise rising interest rates will in turn mitigate the adverse effect that such rates are having on debt in the real estate market.
The change of Chancellor on 14 October 2022 resulted in the much-reported series of U-turns from the announcements made in the ‘mini-budget’ on 23 September 2022. However, a handful of those announced changes survived, one being the changes to the rates of SDLT payable on the purchase of residential property.
In summary, the nil rate threshold has been raised from £125,000 to £250,000 and first-time buyers will now not pay any SDLT on the first £425,000 of their purchase price (an increase from £300,000) and will be eligible for this benefit on purchases of properties up to £650,000 (up from £500,000).
These changes are, for the moment, enshrined by The Stamp Duty Land Tax (Reduction) Act 2022-23 which came into force on 24 October 2022. Prior to this the measures were temporarily governed by a Provisional Collection of Taxes Motion.
The interest rates rise on 3 November 2022 (to 3%) resulted in an increase to mortgage repayments. The SDLT relief is a welcome respite particularly for first time buyers however the effect is relatively fleeting – the greater challenge being the more enduring issue of affordability of repayments over time. On that basis the relief may be of more limited effect than it first appears. It is also directed predominantly at first time buyers and maintaining demand, however the incentive for more mature homeowners perhaps seeking to downsize or move into later living properties is less apparent. The announcement today that the SDLT relief is a temporary measure which will endure until 31 March 2025 before being “‘sunset” is a further limitation.
Online Sales Tax
A topic of discussion in previous budgets, the Chancellor has been under pressure to introduce an online sales tax (OST) and which could be used as a tool to alleviate business rates or to put businesses on a more even par with online sellers. It has been reported that internal Government calculations predicted that a potential £1bn could be raised per annum based on a 1% tax on sales of online goods by companies exceeding a £2mn revenue threshold. However, the Government has decided not to introduce this tax given “concerns raised about an OST’s complexity and the risk of creating unintended distortion or unfair outcomes between different business models.” The Government has promised a response to the OST consultation “shortly” which we anticipate will elaborate on the policy decisions to dispose of this proposal.
Somewhat unexpectedly the Chancellor directly addressed the hot topic of business rates. The detail in the written Statement runs to a page and provides much greater detail than has been included in recent budgets.
The consumer price index inflation measure for business rates calculation reached 10.1 per cent (as a result of a forty year high in inflation) - giving businesses acute cause for concern (as flagged in our article of 2 November 2022). The Statement acknowledges that businesses are facing “significant inflationary pressures” and the proposals announced are set against the context of dwindling post-pandemic business rates support. There will be a c.£14bn tax cut over the next 5 years with business rates of an estimated two-thirds of properties remaining static next year.
A new Transitional Relief Scheme was also announced which it is estimated will benefit around 700,000 rate-payers by offering some relief to the increase in their rates bills following revaluation in 2023-24. The relief scheme will provide graded “upward caps” of 5%, 15% and 30% for small, medium, and large properties respectively. Freezes applied to rates multipliers (49.9 pence and 51.2 pence) will also offer support.
There will be winners and losers. Support is promised for 80,000 small businesses and retail, hospitality and leisure sectors (those impacted most severely by the pandemic) where relief will be extended and increased from 50% to 75% up to £110,000 per business in 2023-24. However, sectors such as logistics and warehousing will not experience equivalent relief.
It is hoped that these steps will incentivise investment and prevent further closures on the high street. However, we anticipate continued pressure for fundamental reform of the rating system.
UK Hospitality chief executive, Kate Nicholls, has been quoted in the Financial Times as “welcoming the shift on business rates”. The British Retail Consortium has also commented that “the Government has taken an essential step towards longer term reform of the broken business rates system by announcing the scrapping of downwards phasing of transitional relief. This decision means that April’s bills reflect market conditions and retailers will pay only what they owe, rather than being forced to overpay their rates bill when the value of their property has already fallen.”
R&D and Innovation
Setting out an ambition for the UK to be the “next Silicon Valley” the Chancellor announced “innovation” as a growth priority and singled out sectors such as digital, green technology and life sciences as being those with the most potential. They will be “supported through measures to reduce unnecessary regulation and boost innovation and growth.”
By the end of 2023 changes will be announced to EU regulations and the Government will legislate to give the Digital Markets Unit new powers to challenge monopolies and to encourage competition.
The UK’s research and development budget will be protected and increased to £20bn a year by 2024-25, a cash increase of around a third compared to 2021-22.
These announcements, and the Chancellor’s reference to the country as being a “science superpower”, will be welcome news for real estate clients operating in the life sciences sector where there have been concerns that cuts to R&D investment would impact the UK’s status as the leading life sciences centre in Europe.
The Statement also announces the final Solvency II reforms, which will “unlock tens of billions of pounds of investment across a range of sectors.” Melanie Leech of the BPF has commented that “the reforms of Solvency II have the potential to unlock further institutional investment.” However, she cautions that “the lack of necessary investment in local authorities and continued uncertainty about planning reform are a fundamental risk for the Government’s ambitions for levelling up.” Click here for a link to our podcast on Solvency II and the Big Bang.
Infrastructure and Levelling-up
The Conservative Manifesto 2019 promised an “infrastructure revolution” with spending “on roads, rail and other responsible, productive investment.” Despite this, in the run-up to the Statement, cuts to capital expenditure were widely anticipated off the back of Michael Gove’s recent comments regarding a “review” of capital budgets.
However, the Chancellor’s Statement has dismissed a number of concerns, at least in the context of investment in infrastructure (roads, rail, broadband and 5G infrastructure). The approach acknowledges that “connections matter because they allow spread of wealth and opportunity” and favours growth - underpinning the Government’s wider levelling-up agenda. The Levelling up and Regeneration Bill is currently making its way through Parliament (for further details of the bill see our article of 16 November 2022).
Support for delivery of projects across the Government’s infrastructure portfolio will take centre stage. The Chancellor confirmed that he will proceed with “round 2” of the Levelling Up fund, at least matching the £1.7bn from round one. Commitments to deliver northern powerhouse rail, HS2 to Manchester, east west rail and gigabit broadband rollout were also reiterated and planning reform was (again) promised to assist in the faster realisation of such projects.
Planning reform has been somewhat of a sore spot for the Government in recent years with the publication of white papers and then subsequent loss of momentum or change of course and therefore clarity on reform would be particularly welcomed by the real estate sector. Updates to National Policy Statements for transport, energy and water resources have been promised in the Budget to be carried out during the course of 2023.
Kitty Ussher, Chief Economist at the Institute of Directors (IoD), commented that “in the longer term, raising the productive potential of the economy through supply-side measures is the way to reduce both inflationary pressure and the pressure on Government borrowing for budgets to come.” On supply-side reforms, the IoD also welcomed “the Government’s commitments to maintain the planned growth in capital budgets for the next two years.” Although capital budgets for infrastructure projects are being maintained and, in some respects increased, the Chancellor acknowledged that they will not increase as planned.
Climate and Energy
On the topic of climate change (and coming straight off the back of COP27) the Chancellor confirmed the Government’s commitment to the Glasgow pact agreed at COP26, despite the current economic pressures. In particular he expressed a commitment to achieving a 68% reduction in emissions by 2030.
The OBR’s forecast for the UK’s inflation rate is to be 9.1% this year and 7.4% next year and the Chancellor identified high energy prices as taking the majority of the blame for the downward revision of this forecast since March 2022. As part of the Chancellor’s three-pronged growth priorities plan (energy, infrastructure and innovation), he announced that “cheap low carbon energy must sit at heart of modern economy.”
“Energy independence” and “energy efficiency” were the buzz words for the Chancellor’s approach to energy demand and delivery and to reduce climate impact. The direct benefits from accelerating investment in offshore wind, carbon capture and storage and nuclear were identified as 1) securing affordable energy 2) limiting the possibility of energy supply being “weaponised” by other countries 3) new export opportunities and 4) realising net-zero targets. The new £700mn nuclear plant at Sizewell C was announced which is intended to create reliable low-carbon power to 6m homes for 50 years.
The Chancellor also set a new national aim of reducing energy consumption by 15% by 2030. This ambition will impact individuals and businesses alike. Public and private investment in energy efficiency (carrying a £6bn price-tag) and “a range of cost-free and low-cost steps to reduce energy demand” will support this plan. Energy independence plans and new energy efficiency taskforce will also be launched.
As announced in advance of the Statement, the Government will review the Growth Plan and in particular the Energy Price Guarantee. The guarantee will continue in place until April 2023. A new Treasury-led approach to supporting energy bills would be formulated to ensure that costs are managed in the longer-term instead of continuing to support short-term solutions which expose public finances “to unlimited volatility in international gas prices.” This will clearly be of interest to residential occupiers. In terms of businesses and their commercial energy bills, the Chancellor has stated that “any support for businesses will be targeted to those most affected” and that the proposed new approach “will better incentivise energy efficiency.”
The Chancellor trod carefully in announcing windfall taxes, cautioning that taxes should “be genuinely about windfall profits” and “temporary so as not to “deter investment.” From January 2023 until March 2028 there will be an increased levy on energy (oil and gas) profits by 10 percentage points to 35%. Additionally, and also from January, there will be a new temporary 45% levy on electricity generators (only on “extraordinary returns”). The green energy sector had warned the Government, in advance of the Statement, about the impact that a “de factor UK windfall tax on green energy” would have on them.
Increases to rent paid by tenants in the social rented sector will be capped at 7% in 2023-24 which is intended to support people in social housing in England with the cost of living (it is estimated that the average in-the-pocket saving will be £200 next year). Whilst this measure will provide a degree of protection for certain tenants, it is less than the 5% cap suggested in some pre-Statement reports (but better than the 10% increase which might have occurred given current rules governing rental increases). Beyond the positive impact on tenants, this element of the Statement will be of greatest relevance and interest to investors and landlords operating in the social rental sector either directly or through build-to-rent or other mixed tenure residential developments.
The Chancellor also announced that the Government would be creating new “investment zones”, surprising perhaps given the Prime Minister’s recent interjection to put his predecessor’s plans regarding such zones on hold. However, the geographic remit of these zones is somewhat limited with the focus centring around universities “in left behind areas.”
Investment zones bring with them all of the hallmarks for growth including flexible and streamlined planning and reduced regulation which, crucially, leads to the building of homes and addressing of the housing crisis. The Chief Executive of the BPF, Melanie Leech, has expressed support of the Government’s commitment to levelling up and is “pleased to see the retention of investment zones” and is looking “forward to sharing [the work of the BPF] and building on it with the Government.”
The Chancellor stated that “sound money is the rock on which long term prosperity rests.” The country finds itself now perhaps somewhere between that rock and a hard place as we move through the (predicted) next two years of recession.
“Stability, growth and public services” were the Chancellor’s touchstones for this much anticipated Budget and with £55 billion of “consolidation” to find, the choices were never going to be easy. It remains to be seen as we head into stronger economic headwinds whether the right calls have been made and whether the above policy changes will assist the real estate sector in 2023.