INSIGHT: UK budget ups industrial spending, but little direct focus on chems

LONDON (ICIS)–“Cut the debt burden, don’t decimate the economy”

This was the message in miniature from IMF chief economist Pierre‑Olivier Gourinchas when several reporters posed questions about the then-upcoming UK budget at a press conference on 24 October.

Reporters from both sides of the political aisle raised questions over the potential impact of the budget, which had been expected to focus on aggressive cost-cutting after weeks of the ruling Labour government fulminating about Conservative debt.

Widening the scope of the question beyond the UK, Gourinchas noted that high debt levels left countries more exposed to fiscal shocks that could precipitate the need to cut services dramatically and quickly.

“When countries have elevated debt levels, when interest rates are high, when growth is OK but not great, there is a risk that things could escalate or get out of control quickly,” he said.

“Most countries have important needs when it comes to spending, whether it’s about central services, what we think about healthcare, or if we think about public investment and climate transition. So we need to protect also the type of spending that can be good for growth,” he added.

UK Chancellor Rachel Reeves seems to have kept that balance in mind with a high-tax, high borrowing, high spending budget, with increases targeting businesses through higher per-employee tax contributions, farmers through tighter inheritance tax rules, and the wealthy through more tax on private schools and private planes.

The measures are expected to modestly goose economic growth in the short term but less so further ahead, according to the Office for Budget Responsibility, which estimates that national GDP will grow 2% next year. This slows down after, back to the prevailing trend of 1.5% per year.

The budget represents one of the largest increases in taxation ever seen in the country, but the UK is far from alone in this. With borrowing costs high over the last few years and economies still paying the bill on pandemic and energy crisis-era borrowing, taxation is high across much of the developed world at present.

Debt as a share of GDP is not expected to rise through to the end of the decade on the back of the budget, but nor is it expected to fall, standing at just under 100%.

UK debt as a proportion of GDP

Higher spending is likely to drive higher inflation in the short term, with levels now expected to firm from 1.7% in September 2024 to a quarterly peak of 2.7% in mid-2025, according to the OBR.

The core UK sector trade body, the Chemical Industries Association (CIA), cautiously greeted the increase in investment spending, something that has been sorely lacking in the UK for decades.

“We are pleased to see increases in investment after the UK has been in the bottom of the G7 for investment as a share of GDP for 24 of the past 30 years,” said CIA head of economics Michela Borra.

That persistent low ranking has endured despite the decline for other western European economies in the G7 club in the face of weakening international competitiveness.

Whether the level of public industrial investment is sufficiently substantial to drive growth remains to be seen, however.

The budget earmarks £2 billion for the automotive industry for zero-emission vehicles and related supply chains, and £975 million for aerospace research, to be eked out over five years.

Life sciences spending  is also set to get a bump, with £520 million to go to the creation of a Life Sciences Innovative Manufacturing Fund “to build resilience for future health emergencies”, the UK Treasury said.

Automotive, aerospace and life sciences are key end markets for the upstream chemicals sector and all additional growth investment is a welcome surprise when the expectation in the run-up was for no new funding or spending cuts.

That said, the electric vehicle market has slowed to a cruise after years of steady year-on-year growth, with still-developing technologies and charging infrastructure availability continuing to spook consumers.

Charging infrastructure remains a Catch-22 problem, with consumers put off by limited availability and providers sceptical of demand growth levels. Firms have moved to take the first step but the level of investment in electric vehicle charging networks remains below what is needed.

Another significant milestone is the recognition of a fuel-exempt mass balance approach for content in chemical recycling, which could help to map out the landscape for the sector as it matures.

Under fuel exempt mass balance accounting rules, volumes used in fuel applications would not be attributable as recycled material, but material not ending up in fuels would be freely attributable across the value chain.

Far larger than all the chemicals end market funding outlined in the budget is the nearly £22 billion for carbon capture and blue hydrogen announced earlier in October.

With an aim to strengthen two of the country’s regional industrial clusters, the funding is expected to develop two carbon capture projects in Merseyside and Teesside, as well as two clean hydrogen production plants.

Chief among the benefits of the budget is the hope that this will represent a stable longer-term roadmap for business investment, after a period of substantial changeability for government priorities during the ministerial and leadership churn of the last few years of Conservative government.

“Capital intensive sectors such as chemicals will welcome this Government’s commitment to longer term policy stability – be it through its industrial strategy; its corporation tax roadmap or its full expensing regime to encourage investment in plant and equipment,” said CIA chief Steve Elliott.

Despite the stronger than expected focus on capital investment, there is little direct uplift for the chemicals sector, which remains the UK’s third-largest industry in terms of GDP contribution.

The only reference to the sector in the full budget text is to the mass balance recognition and, while greater focus and clarity on carbon, hydrogen and renewable power remain vital for the evolution of the sector, it remains difficult to hold policymaker attention.

With the number of strategic reviews of European chemicals footprints by large global players continue to pile up, the lack of impetus to shore up a sector that has been mired in low and declining growth continues to pose a threat to its future viability.

“It’s now all about delivery as the UK and wider Europe has become increasingly unattractive to global investors in manufacturing,” said Elliott.

“Urgent action – and in many cases partnership between industry and government – is required if UK chemical businesses are to boost their already significant contributions to the macro-economy; strengthen their resilience in supporting the nation’s critical infrastructure and enable the country’s transition to a net zero future,” he added.

Insight by Tom Brown.