Chancellor Hunt treads carefully
Given the context, the Autumn Statement had to reassure international creditors that Britain can make tough choices. This comes after a series of events in recent years, Brexit in 2016, the protracted wrangles over the Northern Ireland protocol, almost non-existent bilateral UK trade deals, the fiasco of the Liz Truss Budget and five governments in under six years – that has tarnished the UK’s reputation overseas.
The government wants to transmit the gilt yield decline (from 5.10% (12 October 2022) to 3.2%) as a first step towards lowering mortgage rates, which remain elevated at near 6% (NatWest 2 YR fix 5.99%/ 5 YR 5.69%). So far mortgage rates have not declined as fast as gilt yields.
The electoral cycle with a little over 2 years left in this Parliament is important as the Westminster thinking is Sunak will leave the election until January 2025. The measures today give time for the government to recover support.
Given the trailing of this Budget we were frankly surprised at the lack of short term ‘painful’ measures that we thought would be adopted.
The GDP forecasts revised
The ONS has forecast the UK will grow 4.2% in 2022 but decline by 1.4% in 2023 and grow by 1.3% in 2024 and c. 2.7% in 2025.
The Autumn Statement measures are aimed at keeping the forthcoming recession shallow by not hurting middle income voters and keeping the promise to lower income households.
A ‘consolidation’ of £55bn
The Chancellor has said ‘just under half’ will come from taxes and ‘just over half’ from spending.
In terms of the changes to income tax, the top rate (45%) threshold will decline from £150k to £125,140.
The personal allowance will remain at £12,570 and be frozen at this level until 2028.
Other income tax thresholds will be frozen at FY22 levels until FY2028 – this will mean approx. 3.2m people will start paying tax due to inflationary pay rises over the next six years.
National Insurance and Inheritance Tax thresholds will be frozen until April 2028.
The dividend allowance will reduce to £1,000 in FY23 and to £500 in FY24 from £2,000 in FY22. The CGT allowance will reduce from FY23 onwards to £6k from £12,300 now and to £3,000 from FY24 on.
Energy Bill help / Social Care
A windfall tax on the profits of oil & gas firms will increase from 25% to 35% and be extended until March 2028.
A new temporary 45% tax on electricity generators will be applied from January 2023 – this is intended to raise around £14bn in extra taxation.
Given the expected rise in the Ofgem energy cap to £4,000 in 2023, the Chancellor concluded this expense as being unaffordable for too many people. The Energy Support programme will cap bills at £3,000 p.a.
The Sizewell C nuclear plant is to be green lighted creating 10k new jobs and the UK government will invest £750m in the project.
For the 4m people in the social rented sector facing an 11% rise in rents. The rise will be capped at 7%.
The National Living wage will increase by 9.7% to £10.42 per hour a rise of £1,600 p.a.
The Chancellor is maintaining current levels of defence spending to 2% of the UK government budget in line with NATO commitments, but would like to increase spending following the forthcoming integrated review. No explicit commitment to get to 3% soon was made, however.
The UK government also updated its spending on support for Ukraine had reached £2.3bn.
NHS / Education
Existing spending plans, i.e. another £3.3bn of budgeted spend will remain for FY23 and FY24. However from FY25 the NHS budget increases will be more limited.
Department of Health & Social Care, reforms will be delayed for 2 years. The Chancellor said he appreciated the efforts of its 1.6m employees given the rising population of over 80s.
The Chancellor has decided against imposing VAT on independent schools saying this would be counter productive and lead to significant reductions in school numbers.
However state schools will receive another £2.3bn in FY23 and FY24.
Overseas Aid / Climate change
The UK government has confirmed it is not its policy to return to 0.7% of spending on UK overseas aid – it will remain at 0.5%.
The new government remains committed to its Glasgow COP 2016 promise to achieve a 60% reduction in net emissions by 2030.
The State Pension will rise by 10.1% next April in line with CPI in September (10.1%) – this is a rise of £870 per person p.a. and keeps the pledge on the ‘triple lock’.
The Universal Credit means tested benefits will also rise in line with inflation at 10.1%. These will cost c. £11bn.
The Chancellor expressed concern at the evidence of increases in the work-shy citing the fact that about 630k adults of working age, had not returned to work since the C-19 pandemic.
Conclusion “bark, but no bite”
The Autumn Statement could have been worse. By adopting a creeping stealth tax “Brown-esque” approach, the Chancellor has engaged primarily in ‘tax tomorrow’ that will bolster the government’s short term stability. It has only been one month since Liz Truss. The approach will also cushion the short term impact of weaker UK GDP growth. Stripping out the 2020-1 period the UK’s GDP looks surprisingly static and consistent with levels similar to the last decade.
Investors have responded by banking their gains in gilts, given the fact that the Chancellor’s threshold freeze measures will take time to improve the fiscal position. Reducing CGT allowances and windfall taxes are not politically unpopular measures but do not raise much tax either.
Shares in the power generators have responded well to the measures so far, giving the impression higher taxes had been priced in beforehand.
All told the Autumn Statement is a bit soft, it could have been tougher than has transpired.