It’s hard to find anything to like in the Autumn Statement delivered by Jeremy Hunt. While on the surface, the 2% cut in National Insurance contributions seems like a good idea, it looks worse the more you examine what it means and its implications. The Office for Budget Responsibility (OBR) references to the ‘headroom’ to make fiscal adjustments are pretty damning, primarily since this is written in a language which is official and nuanced.
“The £13.0 billion of headroom against the fiscal mandate in this forecast, while representing an increase on the November 2022 and March 2023 forecasts, is still well below the average headroom of previous Chancellors. This is also in the context of elevated uncertainty around our central forecast, particularly about the outlook for inflation and productivity, discussed later in this chapter, the current strength in tax receipts as highlighted in Box 4.1, and pressures on departmental spending highlighted in Box 4.3.” [taken from page 132, OBR, November 2023 Autumn Statement].
In other words, the headroom disappears if the economic forecasts are worse than expected. That would leave the next government with little wriggle room in the case of an emergency, in the context of the last few years, where shocks have become more frequent, not less.
The second big announcement, ‘full expensing’, which allows companies to claim back tax in total for spending on capital investment, is also a good thing on the surface and should help increase private sector investment spending in the long term. But the sad reality is that it does not, as the OBR figures show below. The next question, of course, is how all of this will be paid for.
Firstly, it comes at the expense of bringing 7.4 million more people into the tax bracket either through an increase in the number of those who pay tax at the basic rate or an increase in the number of those who pay tax at higher rates because of not indexing tax allowances in line with consumer price inflation, see table a. The chart shows that this raises £44.6bn in revenue, more than outweighing the £20bn of tax cuts in the Autumn Statement.
Secondly, the answer was in an aside from the chancellor that public spending growth would be kept below that of growth in the whole economy.
It means a ferocious freeze on public spending if it rises at 1% below the rate of growth of the economy. In inflation-adjusted or ‘real’ terms, this means a £19 billion cut in public spending over the next five years at a time when there’s enormous upward demand for these public services, especially after years of underinvestment.
Moreover, with education, defence, and health services protected from cuts, real-time 2% per annum cuts in other departments, such as local authority spending and transport, are implied, according to the Institute of Fiscal Studies (IFS).
That is undoubtedly a return to austerity and falling investment in real terms across the public sector spending (indeed politically unfortunate with Cameron coincidentally brought back into the Cabinet). Even in ‘protected sectors’, such as defence, the NHS, and education, the history of the last 15 years is that spending has fallen in inflation-adjusted terms.
Despite these tax cuts and offsetting spending cuts, tax as a share of GDP is expected to reach 37.7% in 2027, a post-war high and the exact figure that the OBR predicted in the March budget, see chart b.
Indeed, it’s worse than this; if one looks at the forecast for private investment capital spending, it shows a consistent decline over the next five years. That is terrible news in an environment where – as Jeremy Hunt himself said – the G7 economies spent more on investment, at a 2% annual rate, than the UK. Yet, the UK’s underinvestment will continue over the forecast horizon. Even the full expensing does not prevent private sector investment from falling or, at best, remaining stagnant over the next few years; see Chart c.
But the bad news doesn’t end there. The UK is still set for the worst fall in living standards since records began to be kept on this basis in the 1950s, see chart d.
Economic growth has been revised lower for the next couple of years, and government investment is expected to fall every year for the next three years. The good news is that recession is expected to be avoided, and the UK should expand, albeit modestly.
This Autumn Statement looked only at the next general election and did little to address – other than full expensing – the long-term supply-side reforms the UK desperately needs. The reforms are well known, making the planning system more flexible to make it easier to build where businesses need to expand and people want to live and work, the reform to NVQ education, return of technical colleges, reopening youth centres, bringing back nurses’ bursaries; the list goes on. Unfortunately, none of those issues were addressed in the Autumn Statement.
Arguably, there was no long-term vision, no narrative about the future or how to face the undoubted challenges that the new century has brought both at the geopolitical level and closer to home. One of the fundamental problems that the UK faces is an ageing population, combined with weak productivity and low wage growth, leading to continued upward pressure on public spending to provide the increased services required as the population ages and there are fewer workers.
Of course, one thing it does politically is to leave any new administration with no money to spend after the next general election. There will either have to be additional borrowing or further tax increases. In terms of responsibly managing the UK’s economic future, this is not a good Autumn Statement, nor a good look for the party he represents.
On the other hand, it lines the UK up for a General Election to be called in the spring of next year or provides an option to call an election at that time. That is because the announcements on the full expensing and the cutting of National Insurance will take effect from the 1st of January rather than waiting for a budget in March to do so.