A serious Statement for serious times
The Office for Budget Responsibility is not as pessimistic as the Bank of England as to future its growth forecasts but it is still of the view that we have entered into a recession, that disposable incomes are falling further and faster than at any time since records began and that the public finances have deteriorated substantially.
The Chancellor has responded in broadly three ways. First, he has loosened the fiscal rules. Debt falling by a proportion of GDP by the fifth year of the forecast and, in the same year, borrowing being less than 3% of GDP, are less ambitious rules than we have had for some time – certainly since 2010. He only just meets these tests. Second, taxes are going up. Third, spending will be very constrained, especially after 2025.
On taxes, most of the policies were pre-briefed. Nearly all of the revenue is coming from "fiscal drag" – allowances and thresholds being frozen and therefore falling in value in real terms. There is also a very big windfall tax on the energy sector. In addition, we saw some taxes focused broadly at the wealthiest – the lowering of the additional rate threshold from £150,000 to £125,140, lowering the CGT allowance, increasing the dividend rate of income tax – but these were there to set the tone and demonstrate that "we are all in it together" rather than raise much revenue. The Shadow Chancellor, Rachel Reeves, criticised the Government for not abolishing non-dom status and carried interest and these policy areas are likely to remain contentious. Hunt defended non-dom status by arguing that he "did not want to damage the long-term attractiveness of the UK".
On spending, the Government is sticking to its current spending plans up to 2025. When these were set out in cash terms in 2021, these plans looked relatively generous but inflation will mean that they are likely to feel tight, especially given the pressure on public sector pay. After 2025, spending will go up by 1% in real terms which will mean cuts for unprotected departments. It remains to be seen whether this really will happen.
The upshot of all of this is that the economy remains in a fragile condition, tough choices on the public finances will still need to be made in future and tax policy – especially in the context of non-doms – will remain contentious.
Further commentary from our tax, private client and real estate teams can be accessed below.