View from Vox: the Budget’s high-tech vision is good news for investors

This week’s Spring Budget was arguably the most important in some years, as the nation seeks answers to the pressing issue of the UK’s economic malaise. Although news from the Office for Budget Responsibility (OBR) that the UK may narrowly avoid a recession, and that the annual rate of inflation was expected to halve by the third quarter, it’s still evident that there are numerous problems for the government to resolve, not least how the country can drive growth and remain competitive in the world. 

In the end a Budget that delivered lots of interesting news for stock market investors was rather overshadowed by the goings on in the banking world, and in particular serious worries over the financial stability of Credit Suisse. Fears of further contagion dragged the FTSE 100 to close down 3.8%, it’s biggest one day fall in over a year and continuing a horrible week for the banking sector in particular following the collapse of Silicon Valley Bank last week.

Credit Suisse has now secured a lifeline from the Swiss central bank, which has restored some calm to markets, even if it still begs many questions about the broad stability of the financial sector and the moral hazard behind it. Back to the Budget, though, and the big question was whether the debt-constrained Chancellor Jeremy Hunt could find enough lifelines to throw the beleaguered economy.

Back to work

If the OBR is right, then the answer is yes, arguing that by focusing on initiatives to expand the labour force the Budget is likely to provide the biggest boost to GDP of any since 2010. Labour supply matters, because wage inflation has been a huge problem for companies across all sectors this year. and economic inactivity has continued to rise after the pandemic, compounding the impact of Brexit as people leave the job market. 

So, alongside improved childcare that should allow more new parents back to work and plans to support apprenticeships for older workers – so called “returneeships” - the lifetime allowance was abolished entirely to encourage people to stay in work for longer. Labour has said that if it comes to power it would scrap that particular reform, dismissing it as a tax cut for the rich. That seems somewhat short-sighted, given many of the 15,000 highly paid workers the government is trying to stop retiring are doctors, and a shortage of GP capacity is partly behind rising long-term sickness that is one of the biggest labour problems facing the country.

No Budget could be expected to fix that overnight, but it did point to various initiatives to help get the 2.5m people who are unable to work due to illness back into employment, including the use of digital technologies to speed up diagnoses and tackle leading causes of illness such as mental health. That could be good news for companies like Kooth (KOO)Follow | KOO, a leading provider of AI-assisted wellbeing tools which are gaining traction around the world. 

Innovation, innovation, innovation

Alongside the development of cancer vaccines, AI therapeutics for mental health is a particular focus for the UK’s medicines regulator, the MHRA, which will have an accelerated approval process in place by 2024 supported by an extra £10m a year of funding. Again, that’s good news for the country’s myriad of small drug developers and healthcare providers, many of which are using AI to improve their chances of success and patient outcomes, as we wrote in our latest sector report.    

Reflecting that kind of technological partnership, the Budget recognised the UK’s capabilities in other sector’s key to future growth – £900m to build an exascale supercomputer required for leading-edge AI research; £100m for the Innovation Accelerators programme to fund 26 major R&D projects focused on healthcare, computing and quantum technologies, like those targeted by  Aquis-traded investor Quantum Exponential (QBIT)Follow | QBIT; £2.5bn over 10 years to fund an ambitious quantum research programme; £20bn to fund carbon capture and storage deployment, potentially good news for UK small cap Getech (GTC)Follow | GTC; and the launch of Great British Nuclear to drive the delivery of the large-scale nuclear projects and small modular reactors essential to a carbon neutral energy system.  

All well and good, but delivering the such an ambitious programme represents a major challenge and critics will no doubt point out that growing advanced industries is hardly a new government aim – White Heat 3.0 as it were. And headlines surrounding the budget are predictably focused not on the vision but the cost and who will be paying for it. 

That would be taxpayers, of course, and especially those that fall into higher tax brackets as wages rise but tax thresholds don’t, an effect known as fiscal drag which is forecast to raise an additional £29bn by 2028. A higher corporation tax rate – 25% from April, up from the current 20% - is also a concern for investors, whose share of profits potentially sinks in future despite the introduction of “full expensing” for capital investment over the next three years. 

But put fiscal gymnastics to one side, and the direction of travel outlined in the budget is clear – green and advanced digital industries, advanced manufacturing, life sciences and creativity, as well as providing the physical infrastructure to support them. 

And it’s not unreasonable to suggest that the UK has, in contrary to the popular declinist narrative, enjoyed much success in these areas already through its leading universities, and in sectors like fintech, where London has become the second largest hub in the world reflecting the narrowing venture capital gap between the US and UK since the 2017 Patient Capital Review. The Budget in fact saw the extension of the Patient Capital initiative for 10 years, ringfencing a further £3bn of R&D investment, and  also delivered plans to unlock £364bn of local government pension scheme assets to support investment into high-growth sectors.

As ever, growth investing in blue sky tecnology comes with risks – not every venture will succeed, not least as other countries and companies are trying to pull the same trick as the UK. But as the saying goes, you’ve got to buy a raffle ticket to stand a chance of winning – and with this Budget, the Chancellor seems to have at least bought a few strips.