Analysis: Hunt’s Bad Budget News
Following Jeremy Hunt’s belt-tightening Autumn Statement, Rolf Merchant recaps the key measures to look out for.
On November 17th, Chancellor Jeremy Hunt delivered what some reckoned to be the most consequential fiscal statement since the days of George Osborne.
Few Chancellors have been dealt such a bum hand. Mr Hunt, just five weeks into the job, is grappling with high inflation and low growth, all with no fiscal firepower left in the Treasury’s armoury.
Mr Hunt’s statement offered no giveaways and no rabbits pulled from a hat. It was a serious mixture of personal tax rises, a windfall tax on energy companies, and cuts in certain areas of public spending.
Here are the highlights of what Mr Hunt said and how it will impact Britain:
Seeking stability
The Chancellor opened his statement by trying to strike a caring tone. He said he understood people are worried about the future and his response is to put economic stability first. He added that the most vulnerable would be protected because “to be British is to be compassionate and this is a compassionate government.”
These first phrases, giving a frank assessment of the state of Britain’s finances, are an incredible contrast to the speech Kwasi Kwarteng gave just a few weeks ago. From that same despatch box, Mr Kwarteng promised “a new approach for a new era” and delivered it with seemingly boundless optimism. Mr Hunt’s comparative sobriety is a remarkable counterpoint.
An inflation crisis made in Russia
Jeremy Hunt sought to rebut the line that Labour has been hammering for the last few months: this is an economic crisis of the Conservative Party’s making. Mr Hunt pointed out that every economy is still trying to recover from the Covid pandemic and this has been compounded by a “made in Russia energy crisis”.
The Chancellor pointed to the travails of other advanced economies where inflation is higher than in the UK and singled out Germany as having lower growth than Britain. The obvious subtext is that today’s crisis isn’t a singularly British one and so blaming the current government is simply an attempt to score political points.
Mr Hunt made it clear tackling inflation was his number one priority. “Inflation eats away at the pound in people’s pockets even more insidiously than taxes,” he said. The Chancellor told the House he wants to see low taxes but reiterated “sound money” must come first. Critical viewers will see this as promising jam tomorrow, especially given his decisions to increase the tax burden on individuals.
The ritual of firing out stats from the Office of Budget Responsibility came next. The salient messages from the OBR are that the UK is already in a recession, the economy will shrink by 1.4% next year, inflation will fall to 7.4% next year, and unemployment will rise to a peak of 4.9% in 2024. In short, things aren’t going to be improving anytime soon.
Facing the facts with tax
Anyone hoping for surprises on tax will have been left disappointed. The headline changes were circulating in the media days before Mr Hunt stood up in the Commons.
After months of pushing back on raising a windfall tax on energy companies, the Chancellor reversed course and announced a time-limited uplift of the Energy Profits Tax, and brought in a new levy on energy generators. This is designed to raise £14 billion next year.
The 45p additional rate will now be payable for those earning more than £125,000, lowering the threshold from £150,000. This is expected to bring in an extra £790m to the exchequer by 2024-2025.
The Chancellor announced a freeze on the income tax personal allowance, the higher rate, national insurance and inheritance tax thresholds until 2028. In real terms, everyone will be paying more tax thanks to the effect of the ‘fiscal drag’.
Another well-trailed policy was introducing a road tax on electric vehicles. Smug Tesla owners will be aggrieved to know that from April 2025 EVs will no longer be exempt from Vehicle Excise Duty.
The fiscal hole won’t be filled by tax rises alone. The Chancellor has sought savings by scaling back Britain’s international commitments. As expected, the 3% GDP spending target for defence has been binned. How much of a row that will cause remains to be seen. The UK won’t be hitting its target of spending 0.7% of GNI on international development either.
Energy and infrastructure
Britain’s energy independence is top of the political agenda. The Chancellor positioned it as a strategic necessity for Britain’s future growth. His main announcement was confirmation of the state’s backing for the Sizewell C nuclear power plant. Energy efficiency for homes and buildings is now a core plank of the government’s strategy, with Mr Hunt pledging an extra £6bn to be spent to insulate homes and upgrade boilers.
The Chancellor laid out a second strategic pillar for long-term growth: infrastructure. Despite some speculation that big-ticket spending would suffer cuts, Mr Hunt said there would be no reduction to capital expenditure. Significant projects including Northern Powerhouse Rail, HS2 to Manchester, the new hospitals programme and gigabit broadband rollout will go ahead.
The Westminster rumour mill was weighing up the likelihood of a cut to the R&D budget. In the event, Mr Hunt confirmed the budget would be protected, and in fact, will be increased to reach £20bn by 2024. This, he argued, is the platform for future growth, coupled with plans to change Solvency II regulation which will unlock billions in investment to scale up British companies.
Living wage upgrade and pensioners protected
The effects of inflation are being felt most acutely by low earners and those reliant on the state. The Chancellor could not have credibly called this a compassionate budget without targeted support for them. His decision to increase the National Living Wage by 9.7% to £10.42 an hour will benefit two million of the lowest paid. Mr Hunt announced all benefit payments will be raised with inflation – at one stage the media reported that benefits would have to be cut in real terms – but the Chancellor rejected such a move.
Perhaps the biggest cheer for the Conservative benches (incidentally, there weren’t many of the loud celebratory roars from that side of the house as you usually get at a budget event) came when Mr Hunt confirmed the pension triple lock will remain. This means the state pension will rise with inflation and the Chancellor avoids an enormous political battle with his own party colleagues, who warned against abandoning the triple lock.
A recovery made in Britain
The Chancellor could hardly conclude his speech with a lap of honour. These were tough messages to deliver reflecting the harsh reality Britain faces. Mr Hunt at least tried to end with a hopeful tone. “The British people are tough, inventive and resourceful,” which, he said, would lead the UK to recovery.
That is hardly a message to rival “Britons have never had it so good”. Indeed, without a dramatic improvement in the economy, Mr Hunt won’t be making such a claim for some time. As things stand, the recovery will be the central focus for the next general election. If that recovery is slow to emerge, Mr Hunt will find himself out of a job, and we can expect a Labour Chancellor to be delivering future budgets.
By Rolf Merchant, Director at Audley
Image credit/NHS Confederation