The Spring Budget: A Boon or Barrier for UK Manufacturing Exporters?

Yesterday, on March 15, 2023, Chancellor Jeremy Hunt unveiled the Spring Budget, laying out the government’s fiscal strategy for the year ahead. For UK manufacturing exporters, this budget was delivered at a critical juncture. With economic recovery post-COVID-19 ongoing, the lingering impact of Brexit, and the global supply chain still under pressure, manufacturers are in dire need of policies that support competitiveness and resilience.

This blog delves into how the Spring Budget helps or hinders UK manufacturing exporters, dissecting key announcements and their potential impact on this vital sector of the economy.

UK manufacturing exporters face a unique set of challenges:

       1.    Brexit Fallout

Since the UK’s exit from the EU, manufacturers have grappled with increased red tape, customs delays, and tariff complications. The loss of frictionless trade with the EU has added cost and complexity for exporters.

       2.    Energy Costs

Soaring energy prices, exacerbated by global instability and the war in Ukraine, have pushed up production costs for manufacturers, making it harder to compete internationally.

       3.    Labour Shortages

Post-pandemic labour shortages and stricter immigration rules have compounded operational difficulties, limiting the sector’s growth potential.

       4.    Global Competition

UK exporters must contend with fierce competition from countries with lower production costs, such as China and India, as well as from the highly integrated economies of the EU.

Against this backdrop, the Spring Budget’s provisions were eagerly anticipated by manufacturing exporters looking for relief and opportunities to grow.

Positive Measures for UK Manufacturing Exporters

1. Full Expensing of Capital Investments

One of the standout announcements in the budget was the introduction of full expensing for business investments in plant, machinery, and technology. This policy, which allows 100% of qualifying investment costs to be deducted from taxable profits, replaces the expiring super-deduction and is set to last for three years.

For manufacturing exporters, this is a significant boon. Investing in modern equipment is crucial for boosting productivity and remaining competitive in international markets. Full expensing provides immediate tax relief, improving cash flow and enabling businesses to reinvest in innovation.

Impact:

    •         Encourages automation and technological upgrades.

    •         Helps UK manufacturers compete with countries offering similar incentives.

    •         Supports sustainability by enabling investments in energy-efficient machinery.

2. Support for Energy Costs

Hunt announced an extension of the Energy Price Guarantee for households and small businesses, which indirectly benefits manufacturers by stabilizing consumer spending. For energy-intensive sectors, the Chancellor also pledged additional targeted support through the Energy Bill Discount Scheme.

While this measure doesn’t directly lower costs for all manufacturers, it offers some relief to those in sectors like steel and chemicals, where energy expenses are a substantial portion of overheads.

Impact:

    •         Provides some stability in an unpredictable energy market.

    •         Reduces the risk of factory closures due to unsustainable energy costs.

3. Boost to R&D Tax Credits

The budget reinstated enhanced R&D tax credits for small and medium-sized enterprises (SMEs) in the manufacturing sector that spend heavily on research and development. Qualifying SMEs can now claim £27 for every £100 spent on R&D.

This is a win for manufacturers investing in innovation to develop cutting-edge products or improve production processes, particularly those focused on net-zero technologies and sustainable solutions.

Impact:

    •         Incentivizes innovation, a critical factor for competing in global markets.

    •         Supports the development of high-value exports.

4. Infrastructure and Trade Facilitation

Hunt allocated additional funding for infrastructure projects, including improvements to ports and logistics networks, aimed at easing trade flows. Enhanced connectivity and reduced delays at borders could streamline the export process, helping manufacturers deliver goods more efficiently.

Impact:

    •         Reduces costs associated with delays and inefficiencies.

    •         Strengthens supply chain reliability, a key factor for international buyers.

5. Skills and Labour Market Measures

The budget introduced measures to address labour shortages, including expanded funding for apprenticeships and skills training. Manufacturing exporters, particularly in advanced industries, depend on a highly skilled workforce to operate cutting-edge machinery and develop innovative products.

Impact:

    •         Improves access to skilled labour in the long term.

    •         Helps manufacturers adopt advanced manufacturing techniques.

Areas of Concern for Manufacturing Exporters

While the budget included some welcome measures, it fell short in several critical areas, potentially hindering the growth and competitiveness of UK manufacturing exporters.

1. No Major Reduction in Corporation Tax

The budget confirmed the planned increase in corporation tax from 19% to 25%, effective from April 2023. While the full expensing policy offsets this for some businesses, it doesn’t entirely mitigate the burden for all manufacturers, especially those struggling with tight margins.

Impact:

    •         Makes the UK less attractive as a manufacturing base compared to countries with lower corporate taxes.

    •         Limits the ability of exporters to reinvest profits in growth.

2. Lack of Comprehensive Energy Strategy

Although energy support measures were extended, the budget lacked a long-term strategy to address the high energy costs that disproportionately affect manufacturers. There was no mention of significant investments in renewable energy infrastructure or support for manufacturers to transition to more sustainable energy sources.

Impact:

    •         Leaves manufacturers vulnerable to future energy price shocks.

    •         Hampers efforts to achieve net-zero targets, a key priority for international trade partners.

3. Minimal Focus on Brexit-Related Challenges

The budget did little to address the ongoing trade frictions and red tape resulting from Brexit. Despite the allocation of funds for infrastructure improvements, there was no specific plan to simplify customs processes or support exporters in navigating new trade barriers.

Impact:

    •         Continues to place UK manufacturers at a disadvantage in EU markets, which remain the largest destination for UK exports.

    •         Increases administrative burdens and costs for exporters.

4. Limited Direct Export Support

While the budget emphasized domestic investment and productivity, it lacked targeted measures to boost exports. Exporters were hoping for increased funding for initiatives like the UK Export Finance (UKEF) scheme or new trade agreements to open up global markets.

Impact:

    •         Missed opportunity to expand market access and reduce export-related risks.

    •         Limits growth potential for smaller manufacturers looking to enter international markets.

5. Labour Market Measures May Be Too Little, Too Late

Although the focus on skills development is welcome, these measures will take years to yield results. In the meantime, labour shortages continue to hinder manufacturers, particularly SMEs that cannot afford to automate their processes.

Impact:

    •         Prolongs operational challenges related to staffing.

    •         Limits the ability of manufacturers to scale up production.

Balancing the Pros and Cons

The Spring Budget 2023 is a mixed bag for UK manufacturing exporters. On one hand, policies like full expensing and enhanced R&D tax credits provide much-needed support for investment and innovation. On the other hand, the lack of decisive action on energy costs, Brexit-related challenges, and export-specific initiatives raises concerns about the sector’s ability to thrive in a highly competitive global market.

Opportunities to Seize:

    •         Manufacturers should capitalize on the full expensing policy to modernize equipment and improve productivity.

    •         Leveraging enhanced R&D tax credits can help businesses develop high-value products that differentiate them in international markets.

    •         Energy-intensive manufacturers should explore the available energy discounts and consider long-term investments in renewable energy to reduce dependency on volatile markets.

Risks to Navigate:

    •         The higher corporation tax rate will require careful financial planning to maintain profitability.

    •         Continued reliance on EU markets without additional support to navigate trade barriers may limit growth.

    •         Labour shortages must be mitigated through a combination of training, recruitment, and automation.

Conclusion

The Spring Budget 2023 reflects Jeremy Hunt’s intent to drive investment and productivity, but its impact on UK manufacturing exporters will depend on how effectively businesses leverage the opportunities provided. While the measures announced offer some relief, they are not a comprehensive solution to the sector’s challenges.

For UK manufacturers aiming to compete on the global stage, resilience, adaptability, and innovation will be key. Exporters must navigate a complex landscape of rising costs, geopolitical tensions, and evolving trade relationships, using the tools and incentives available to build a stronger, more competitive future.

As we move forward, the government must continue to engage with the manufacturing sector, addressing its concerns and building policies that foster long-term growth. Only by doing so can the UK’s manufacturing exporters realize their full potential in driving economic prosperity.