It is certainly true that the economy has grown more than was expected by the Office for Budget Responsibility in March. It is also true that inflation has fallen, that tax receipts are higher and borrowing is lower, thereby giving the Chancellor more fiscal headroom.
The OBR, however, has made the point that much of the reason for the apparent improvement in the public finances is caused by higher than expected inflation. Inflation, in the opinion of the OBR, is still likely to be above the Bank of England’s 2% target at the end of 2024. Wages have grown by more than expected in nominal terms which means that taxes on income are set to be relatively buoyant. Spending, meanwhile, does not automatically increase in line with this higher inflation. Consequently, higher inflation means that, in real terms, departmental spending is set to be nearly £20bn lower in 2027/28 than was expected in March. The decision Jeremy Hunt has made is to use these future reductions in spending largely on tax cuts.
Delivering economic growth was a key theme of the Autumn Statement. It is true to say that growth is going to be higher than expected in 2023 and that, overall, the size of the UK economy is going to be larger across the forecast period than was previously thought, largely because of recent revisions in data produced by the Office for National Statistics. Nonetheless, growth for each of the next three years has been downgraded and trend growth has been reduced from 1.8 to 1.6%.
In this context, much of the detailed policy announcements produced at the time of the Autumn Statement are designed to improve economic growth. These are the announcements which, although covered relatively briefly by the Chancellor in his speech, are likely to be of most interest to business.
A big theme is the desire to increase business investment, where the UK’s recent record, in particular, has been poor. Measures to address this include a major tax reform to make the full expensing regime permanent, encouraging pension funds to invest more productively, and reforming ISAs to allow savers to invest in Long Term Assets Funds. We have also seen announcements to remove planning red tape and improve the electricity grid.
There are some notable reforms contained within these proposals, although the economy will not see the benefit for some time to come. But, essentially, this was a political event. The overall tax burden is increasing, but with the rate of employees’ national insurance contributions falling in January, the Government will argue that a corner has been turned. Whether the public will be convinced remains to be seen.
You can find our analysis on these and other matters via the links below.