Autumn Statement 2023: Briefing
Image Credit: Flickr - Simon Walker / No 10 Downing Street
Yesterday Chancellor Jeremy Hunt announced 110 new measures to grow the UK economy in the Autumn Statement. Audley’s Rolf Merchant outlines the key points from the Statement - with political analysis.
Overview
Chancellor Jeremy Hunt’s third major fiscal statement since taking the job announced significant tax cuts to businesses with the permanent full expensing regime, and to individuals with employee national insurance cuts. This made the event more eye-catching than many had predicted.
The chancellor promised reforms to the planning system in a bid to increase infrastructure and housebuilding, together with further tinkering to support productivity across the UK with extensions to freeport and EZs, improvements to R&D tax relief, and support for regional growth.
Despite Mr Hunt’s disciplined approach to public spending, the UK’s national debt is barely falling, and is predicted to be 92.8% of GDP in 2028-29.
Meanwhile, GDP growth is predicted to be 0.7% next year, lower than previously thought, and well below the UK’s average annual growth for the past decade.
Mr Hunt reiterated the already announced Back to Work Plan and increases to the National Living Wage, two key moves designed to get more people into work and to be better rewarded.
The chancellor stressed the need for the UK’s public and private sectors to become more productive if the country is to enjoy improved growth: this was the thrust of his policy announcements.
Shadow Chancellor Rachel Reeves attacked the Conservatives’ 13-year record of economic management and argued Britons would not be fooled by Mr Hunt’s rhetoric of a resilient economy.
What’s new and notable?
“Full expensing” made permanent
Full expensing gives businesses the ability to write off capital investment costs into qualifying plant and machinery against corporation tax immediately and in full, rather than having to spread the tax deduction over time. This means that companies that invest in the UK will reduce their tax by up to 25p for every £1 they spend on plant and machinery.
It is designed to encourage business investment (the OBR expect the policy to increase business investment by £3 billion per year) which is widely regarded to be a major factor in improving productivity.
The move was welcomed by a number of think tanks and policy influencers, and even the Shadow Chancellor, Rachel Reeves, indicating that Labour would not change this policy should it form the next government. Mr Hunt described this as “the largest business tax cut in modern British history” – though one could argue repeated cuts to headline corporation tax made in previous years by Conservative chancellors were larger still!
Employee National Insurance cuts
Mr Hunt announced a 2% cut to employee national insurance, bringing the rate down from 12% to 10%. A person earning a median salary of £35,000 will save £450 per year as a result.
He also announced a cut in national insurance for the self-employed, with Class 2 NI being abolished and Class 4 NI being reduced. A person earning the average self-employed salary of £28,200 will be £350 better off as a result.
Both changes will come into force on 6 January 2024. This is quick for a tax cut, which typically come into force at the beginning of the fiscal year (i.e. April).
Some form of personal tax cut was trailed earlier this week, but the size of the cut was larger than many expected, representing the closest thing to a “rabbit out of the hat” moment in this statement. Many in Mr Hunt’s party have been publicly making calls for tax cuts, so this will go some way to respond to those clamouring action. However, because of the ongoing “fiscal drag” (see more below) the real-life impact of this tax cut will be dampened.
Planning reforms
Mr Hunt acknowledged the barriers to business growth and infrastructure investment caused by the UK’s complex planning system – points covered in detail in the new policy paper released today, “Getting Great Britain building again: Speeding up infrastructure delivery.” He announced that the system would be reformed to allow councils to recover the full costs of major planning applications in exchange for guaranteeing faster timelines. If they fail the companies will be refunded automatically.
The chancellor also said he would provide £450mn of new funding for the Local Authority Housing Fund and £32 million for “busting” planning backlog and building in Cambridge, London, and Leeds.
Building housing and key infrastructure is slower and more expensive in the UK than in other European countries. So long as this remains the case, the UK economy is going to continue to lag behind in terms of investment, productivity and growth. The fact that this major, long-term issue is being addressed, albeit belatedly, is a positive. However, it is an enormously complicated challenge, which the government is not going to solve in the year it is likely to have left.
What’s stayed (but might not have)?
6.7% uplift to benefits
Benefits will increase next year by 6.7%, the inflation rate for September.
There had been speculation that Hunt would instead use the lower inflation figure for October when it slowed to 4.6%. This applies to working-age benefits such as means-tested benefits such as Universal Credit, and disability benefits.
Any attempt on the part of the Conservatives to appear to fix the numbers to save on the benefits bill would have been leapt upon by Labour. Mr Hunt was no doubt conscious of wanting to avoid charges of being “callous” and making life harder for the worst-off in society while the cost of living remains high.
Pensions triple lock
Mr Hunt confirmed that the state pension will increase by 8.5 per cent in April 2024 in line with the pension ‘triple lock’.
The triple lock has been a flagship Conservative policy for many years. It mandates that the state pension must rise each year in line with average earnings growth, annual inflation, or 2.5% - whichever number is higher.
This year, the earnings growth figure was the highest number (8.5%). There had been speculation in the past week that Mr Hunt would opt to use a lower earnings figure that excludes bonuses, or even ignore the earnings number altogether, given it is an unusual high (and therefore expensive) number.
The 8.5% rise is well above current and forecast inflation, meaning pensioners will feel a significant benefit.
Mr Hunt will be aware that over-65s are by an overwhelming margin more likely to vote Conservative than for any other party. With current polling the way it is, the need to shore up the core Tory vote base will be the main reason behind this decision.
Inheritance Tax
Earlier in the autumn, there was talk in the media of reform or even a wholesale abolition of inheritance tax at the Autumn Statement. Briefings in last weekend’s papers strongly suggested that any drastic changes to inheritance tax were not going to appear in the Statement. In the event, Mr Hunt did not mention inheritance tax at all.
It is possible that the Spring Budget will contain a cut or promise to reform inheritance tax.
It is acknowledged that inheritance tax is one of the least popular taxes, despite the fact relatively few people are liable to pay the tax. It is also thought that Prime Minister Rishi Sunak is personally motivated to abolish the tax due to a philosophical opposition to it. It appears the risks of “tax cuts for the rich” headlines and an easy attack line for Labour outweighed the positive case for abolition or reform. A number of Conservative MPs spoke out against prioritising inheritance tax cuts, fearing the same.
The politics
Hunt surprises
The headline-grabbing national insurance cuts did seem to catch commentators by surprise. It made this Autumn Statement more of an ‘event’ than many predicted. Nevertheless, Mr Hunt is not thought of as a risk taker and indeed this statement shows the premium he puts on fiscal conservatism. No one was expecting a round of huge tax cuts or drastic changes in public spending. And beyond the main changes detailed above, we mostly heard plans for technocratic tinkering. Still, Conservative MPs will be pleased that after another strategic reset by Downing St, this statement was strategically coherent and offered a modicum of good news as the 12-month countdown to the next general election begins.
Inconvenient truths
Mr Hunt’s delivery was fairly chipper. One could almost imagine he was enjoying himself. Relative to his last Autumn statement which followed hot on the heels of the Truss / Kwarteng debacle, this one must have been much easier to deliver.
However, there are some fundamental fiscal facts which are making his job, and will make his successor’s job, very difficult. UK GDP growth is anaemic and likely to remain so for the foreseeable future. Our national debt is still rising, the interest on which is, in effect, another tax we all have to pay. The combination means the Chancellor has very limited scope to cut tax and / or invest in public services, and especially to make long-term commitments that businesses so crave.
Mr Hunt presented the beginning of a strategy to fix some of the deep structural issues caused by low growth and its attendant problems. This includes the “Back to Work” package aimed to tackle long-term unemployment, announced last week. But the medium-term outlook for the UK economy remains troubling.
Unlucky 13
The salient point of Rachel Reeves’ cross-examination was a simple point: after 13 years in power, economic growth is low to non-existent, debt is rising, and – crucially – people’s living standards have barely increased.
Nonetheless, it was interesting to note that Ms Reeves did not criticise or explicitly say Labour would reverse any of the moves Mr Hunt announced today. Indeed, she welcomed full expensing and the national insurance cut. As the widely expected Labour government gets closer and closer, the scrutiny on what Labour’s plans will be (other than simply not being the Tories) will become more intense.
The narrative that Labour is pushing – Britain is in decline, nothing is working properly, and that we’re all worse off because of the Tories’ mismanagement of the country – does seem to be a view increasingly held by the public. Recent polls have put Labour’s lead at as much as 20 points. Keir Starmer is now more trusted on the economy than Rishi Sunak – something that is incredibly rare for a Labour leader. It would seem that Labour are pushing at an open door with their messaging.
He giveth and he taketh away
For all of Mr Hunt’s trumpeting of tax cuts, he did nothing to address the fiscal drag – the increase in the tax burden due to inflation and income growth. The upshot is the total tax take continues to grow.
As time slips away from the Conservatives, this statement will leave their MPs wondering whether voters will believe Mr Hunt and Mr Sunak when they say they are turning the ship around.
Will the offer of a tax cut lead tell of more sweeteners to come? Or, as thousands of families find their mortgage payments rocketing in the next 12 months, will they see Conservative messaging as something akin to gaslighting?
By Rolf Merchant, Director at Audley