On Wednesday 22nd November, Jeremy Hunt MP unveiled his Autumn Statement, setting out the Government’s tax and spending commitments for the next year. The backdrop to this year’s Autumn Statement presents a number of challenges for a government with likely less than a year until the next General Election. The UK’s inflation rate stands at 4.6%, more than double the Bank of England’s target of 2%. Growth rates have stalled, and the Bank of England is predicting that the UK will see zero growth until 2025.
To better understand the true impact of the decisions in the Autumn Statement and how they will impact both the wider economy, and specific sectors, GK Strategy have developed a briefing containing sector specific insight and analysis from our Senior and Strategic Advisers. Download the Briefing here.
An overview of the Statement by David Laws, Strategic Adviser
The Autumn Statement has been long anticipated and there has been much speculation about what it might contain. Alongside a large number of really quite modest and generally forgettable policy proposals, two big changes stand out, which account for most of the Chancellor's "giveaway". These changes are, firstly, a large 2% cut in employee national insurance contributions (alongside reductions in self-employed NICs) - this will cost around £9.5bn in a full year. Secondly, the announcement of permanent "full expensing" of investment, which will eventually cost around £10bn per year. Neither measure is likely to be opposed by the main opposition parties in Parliament.
What else is noteworthy? Well, for a Government claiming to have a growth strategy, the growth forecasts in the Statement are feeble at best. The economy is expected to grow by a measly 0.6% in 2023 and 0.7% in 2024. More strikingly, the growth forecast for 2025 is only 1.4%, and for 2026-2028 averages just 1.9%. If growth really is this weak, then the UK will struggle to get its borrowing and taxes down, and it's public spending up. Of course, growth forecasts are frequently wrong, and these are so anaemic that it's tempting to think there may be some upside risks, at least in 2025 and beyond. We need growth back at around 2.5% to help meet our fiscal challenges.
How are the tax giveaways being financed? Well, certainly not by "spare cash", but by using the Government's borrowing rules to the full - using the expected borrowing undershoot to reduce the planned increase in the tax burden! And that is one reason why no one is going to feel particularly wealthy after this Budget - the tax cuts will only partially offset the existing massive, planned tax rises, from failing to index tax allowances for inflation. The tax burden as a share of the economy is still expected to rise to 37.7% of GDP by 2027/28 - a postwar high. Rising taxation is one of the reasons which the Office of Budget Responsibility is forecasting that living standards will decline by 3.5% by 2024/25, from the pre-pandemic level. That is the largest such fall since records began, in the 1950s. This is not an easy background for a Chancellor trying to win an election in just a year's time.
Meanwhile, the Chancellor resisted the temptation to reduce the uprating of either pensions or benefits. The former will rise by 8.5% next year, and the latter by 6.7%. The Government is clearly keen not to upset the key pensioner voter group before an election and has decided that the cost-of-living squeeze requires a full benefits indexation too.
Meanwhile, to allow the Chancellor to forecast falling borrowing and debt in the future, he has stuck with his forecast that from 2025 onwards public spending will grow by just 1% per year in real terms. This would be very difficult to achieve and is probably an ill-disguised trap for the Labour Party - the same "trick" that Ken Clarke attempted in 1996/97.
What else can we say about this Statement? Economically, the Government's evident determination to announce tax cuts before the election means that further fiscal "stimulus" will likely come with the Spring 2024 Budget. It is notable that the Chancellor has even insisted that the national insurance cut should take effect from January rather than April. This is highly unusual and will irritate the experts in HMRC. In Spring 2024, expect plans to cut and then phase out inheritance tax - which would seek to draw a dividing line with Labour. Expect plans to increase the future level at which the 40% income tax starts - the current freeze in allowances would otherwise sweep three million more people into paying this tax by 2028. Expect also, perhaps, 2p off the basic rate of tax by or around election day. These tax cuts, and inflation expected above target for next year, probably points to UK interest rates staying at their existing level for most of 2024. But the next rate move, when it comes, is probably more likely down than up.
And what about the politics? Well, the present situation feels very similar to that of 1995/97. A Conservative Party which has probably been in power too long. A Government which has lost its reputation for economic credibility, and which is internally divided. High budget deficits and a big long term tax rise, with modest preelection tax cuts which make only a limited political impact. Implausibly tight public spending plans for the post-election period. For Jeremy Hunt read Ken Clarke, the Chancellor back in 1994/97. Ken was a little more cautious in his pre-election tax cuts (1p off the basic rate of tax in each of the 1995 and 1996 Budgets) than Hunt looks as if he will be. And that could be politically important. But, otherwise, are we heading in 2024 to the same political outcome - a landslide Labour win?
Well, quite possibly. And the Conservative prospects for remaining in Government look bleak beyond next year. But there are two big differences which are still important. In 1997, Blair already had 271 seats in the Commons. Today, Starmer has just 198. That is a mountain to climb. And in 1995/97, the polls were even more favourable to Labour than they are today. Indeed, Labour often polled above 50%. But their outcome in the actual election of 1997 was just 43.2%. Labour today are in the mid-40’s. Could their poll rating yet dip before the election, as the Conservatives claw back some support, and perhaps as other parties like the Lib Dems, Greens and Reform UK improve their positions? This seems very possible. We have less than a year before the next election, and there is much to play for. What is clear again today is that the economy and living standards will once again be centre stage in the political battle.