Today, Chancellor Jeremy Hunt presented the Autumn Statement to the country. After months of chaos in the Conservative leadership, the Statement outlined the government’s proposed budget and vision for the future of public spending and finance. Of critical importance was the need to reassure markets that the UK is on a sustainable financial path, something that was put into serious question after the former chancellor’s disastrous mini-budget announcement in September sent the country into a dizzying spiral of financial scares.
There was wide agreement before the Statement that a priority for the government would be to signal that it is a competent manager of the economy. Far more controversial, however, were the specific measures it would have to take to achieve that. Drawing on the chancellor’s announcement and the accompanying Office for Budget Responsibility (OBR) report, here are some of the key takeaways from the Autumn Statement.
The new tax proposals include broad tax increases for just about everyone. For most, these will primarily take the form of frozen tax thresholds, meaning that as people earn more to compensate for the rising cost of living, more of their earnings will be subject to current tax rates. Additionally, the top rate of income tax will now apply to more earners, as the threshold for paying it has been lowered to just over £125,000 per year, down from £150,000.
Other changes to taxation have been announced as well, but perhaps the most prominent in the current climate is the expansion of a windfall tax (Energy Profits Levy) on oil and gas extractors, going up from 25% to 35%. Additionally, there will be a new 45% windfall tax on energy generators, known as the Electricity Generator Levy.
Also relevant for fuel prices is a planned increase in fuel duty by 23% starting in March of 2023, which the OBR expects to raise fuel prices by an additional £0.12 per litre. This kind of increase is likely to receive increased scrutiny nearer to its activation. In any case, fuel prices are more dependent on what happens to international energy markets as the war in Ukraine continues, so there is still great uncertainty about where prices will be come next March.
The chancellor also announced a slate of changes to spending plans. In the near term, the government will expand the Energy Price Guarantee for 12 months after April 2023 (although typical households will still end up paying about £3,000 per year), along with additional support for households struggling with energy bills. Benefits will also receive uprating in line with inflation starting in April 2023. This uprating will also affect the benefits cap on Universal Credit, and the “triple lock” on pensions will be preserved, meaning the state pension will continue to increase with the highest of inflation, average wage increases, or 2.5% each year.
From a departmental perspective, NHS, social care, and education funding will all be somewhat increased through 2024-25, but the Office for Budget Responsibility estimates a total of £28 billion in reductions to overall planned departmental spending by 2027-28. The short-term increase in funding is financed in part by inflation-adjusted reductions in spending for other departments and expected increases in council tax to help fund social care.
The changes announced today combined with other measures announced since the March 2022 budget will produce an austere fiscal picture. Taxes will be higher and spending will be lower over the medium term to 2027-28, with the majority of the fiscal tightening happening after 2024-25. While this is likely justified on the grounds that there is an immediate economic crisis challenging the UK, there are also political considerations, since it means the government can postpone taking tough decisions before the next general election.
Underpinning the chancellor’s Statement was a growth plan built on three core policies:
Achieving energy efficiency and independence.
Building the country’s infrastructure.
Investing in research and development and promoting innovation.
Some examples of how the government plans to achieve these goals include approving a new nuclear power plant, completing the HS2 high-speed railway, and improving the energy efficiency of homes and businesses, among other things.
However, despite these plans to grow the economy, there is reason to be concerned about the government’s long-term commitment to growth in this Statement. A crucial bottom line is that there are planned cuts to departmental capital spending amounting to £11.8 billion after 2024-25. Adding fuel to the fire is strictly anaemic levels of expected business investment for the next several years.
Perhaps the most concrete short-term investment in growth from this Autumn Statement is the return of per-pupil education spending to above 2010 levels. This and other policies will have to pull a lot of weight for the UK to avoid the painful work of adjusting to a post-growth world. It is unclear, unfortunately, whether they will be able to do so in the face of reduced capital investment overall.
For the average person, the coming two years will be a time of significant hardship, with the economy projected to be in recession through 2023-24. Real GDP is not expected to recover to pre-pandemic levels until 2024-25. Real household disposable income is expected to be 7.1% lower at the end of 2023-24 than in 2021-22. The OBR estimates that the overall effect of the chancellor’s plans will be to keep those numbers from being as bad as they otherwise could have been. Yet, the fact remains that the UK faces the most substantial decline in household incomes it has seen in many decades.
It is clear that the UK faces severe structural issues in the medium and long terms with respect to its growth and general living standards, and Jeremy Hunt’s proposed changes are far from guaranteed to solve those issues on their own. In essence, the hardest decisions about fiscal discipline have been pushed off for a few years. Whether this will restore the credibility the government lost after the mini-budget remains to be seen.