Hi Friend,
The Autumn statement was finally delivered on Wednesday. It was impeccable timing. Squeezed between the Supreme Court rejection of the Rwanda option and the release of the revised numbers for net migration. It was an "Autumn Statement for a country that has turned a corner", said the Chancellor. It was a statement for an economy that had "'hit a dead end" said the Shadow Chancellor Rachel Reeves.
The Autumn statement was a message of continuity. The next stage in the process. The process of thirteen years in government. A period which encompasses five prime ministers, seven chancellors, nine business secretaries and twelve growth strategies. The economy may have turned the corner but policy at times appears to be going round in circles. The Chancellor announced his economic advisory council, set up last Autumn, has, just one year later, been stood down.
It was a statement with generous gives. Pensions uplifted by 8.5%. Welfare benefits uprated by 6.7%. A near 10% increase in the living wage and a 2% cut in the employee rate of National Insurance. Plus a permanent extension of "Full Expensing". The process in which capital expenditure on plant and machinery can be fully expensed against corporation tax in the accounting year.
So where has the money come from?
Just six weeks ago on the 4th October, The Chancellor warned there is no money, as the OBR advised of a £19 billion deficit. Now just 44 days later, there appeared to be a surplus of around £30 billion. A £50 billion swing in just six weeks.
Increasing tax revenues from Corporation Tax and Incomes Taxes have been upgraded as tax hikes on CT and freezing of allowances on PAYE have boosted revenues. Higher inflation and higher incomes have generated "fiscal drag" forcing more into higher payments on higher rates.
Nominal GDP has also been upgraded with a higher GDP deflator activated. Nominal GDP is forecast to increase by 6.7% in the current year. It could well be higher, rising by 8.5% despite the low rate of real growth in the year of just 0.6%. This is important in reducing debt and debt interest to GDP ratios even as debt continues to rise.
Has the Chancellor been prudent?
Not really. Hunt has taken a modest improvement in the public finance forecasts and spent most of it. The spending targets will be met by unspecified fiscal restraint (spending cuts) at some point in the future.
The OBR have to accept the Treasury spending forecasts as given, despite any detail in year three onwards of the forecast period.
Asterisk budgeting "cuts as yet to be identified" return. Health and Welfare are likely to be the beneficiaries. Local government, further education, justice, courts, prisons, HMRC the likely losers.
On full expensing,
On full expensing, Hunt said, "In the Spring, I introduced full expensing for three years. This means that for every million pounds a company invests, they get £250,000 off their tax bill in the very same year.
'The CBI, Make UK, Energy UK and 200 other business leaders have said making this measure permanent would the "single most transformational thing" I could do for business investment and growth. But because it costs £11 billion a year, I made clear that I would only do so when it was affordable."
"Well, with inflation halved, borrowing down and debt falling, today I deliver on that promise. I will today make full expensing permanent. That is the largest business tax cut in modern British history."
Will the impact be that great?
The OBR say it will increase annual investment by around £3 billion a year and a total of £14 billion over the forecast period. Not much of a pay back on a tax cost of £11 billion a year. Fortunately, the OBR suggest the cost to the exchequer is a more modest £4.5 billion a year. [EFO Table 3.1].
The anticipated uplift to investment is also unrealised in the Economic Outlook. The UK capital stock is expected to increase by just 0.2% by the end of the forecast period. Investment reacts in a payback model, not so much to the cost of capital but the anticipated cash flows from higher rates of growth.
The largest business tax cut in modern British history ?
Hunt said it was "the largest business tax cut in modern British history". Paul Johnson, the Director of the IFS (Institute for Fiscal Studies director) suggested that was a "tiny bit cheeky"when contrasted with the much bigger hike in corporation tax, up from 19 per cent to 25 per cent. Corporation tax revenues will increase by 23% or £40 billion over the two year period this year and next as a result of higher CT rates.
Income tax receipts will increase by £27 billion this year and over £20 billion next as a result of fiscal drag. A significant offset to the £10 billion National Insurance giveaway.
Has the Chancellor has been prudent! The cuts had to be funded somehow. "I am going to increase duty on hand-rolling tobacco by an additional 10% above the tobacco duty escalator." He said.
The IFS suggests there are adequate risks to the forecast outlook. There is no provision for the freeze on Fuel Duties to continue. (There has been no change since 2010, a cost of £6.2 billion). It assumes business Rate Relief £2.5 billion would stop in April and cuts in public service spending for unprotected departments could be worth £20.0 billion.
So What Next?
The OBR are forecasting growth of 0.6% this year, 0.7% next and 1.4% in 2023. Inflation is set to average 3.6% in 2024, falling to target in early 2025. Unemployment is set to peak at 1.6 million, a rate of 4.6%.
Public sector net debt is expected to peak at 93% of GDP up from 89% this year. Borrowing is set to fall in each year of the forecast, even as interest payment rises to £120 billion.
Markets reacted well to the Autumn statement. Sterling closed at $1.26 it was $1.21 at the end of October. Ten year gilt yields closed at 4.23%. The Tories jumped four points to close the gap on Labour, only to lose the gain as the immigration figures were released.
Speculation already begins on the election date and content in the Spring budget. There could well be scope for a further income tax giveaway. Further NI or CT cuts would be unlikely. Inheritance Tax is hardly likely to shore up the Red Wall.
On the whole it was a balanced Autumn statement, undermined by the inadequate provisions on spending, diminished by the Chancellor's claims of the "Largest Business Tax Cut in Modern British History" ... Cheeky or what!
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