Chancellor Jeremy Hunt set out plans to reduce the shortfall between receipts and public spending in his first formal fiscal event on 17 November 2022.
The Autumn Statement contained his response to rising interest rates, accelerating inflation and an economy entering recession, all factors that have adversely affected the public finances. This included tax increases that more than offset the tax cuts that survived from his predecessor Kwasi Kwarteng’s mini-Budget, as well as pencilling in significant cuts in public spending over the next five years compared with previous plans.
The Office for Budget Responsibility (OBR) published its latest economic and fiscal outlook, confirming a significant deterioration in the prospects for the public finances since it last officially reported in March 2022. The OBR’s updated forecasts indicated that rising interest rates would contribute to an extra £47bn a year of public spending by 2026/27, while a weaker economy would cause an additional shortfall of £28bn, of which £25bn arises from lower tax receipts.
In response, the Chancellor has pencilled in tax rises and policy changes amounting to £27bn by 2026/27 in an attempt to reduce the speed at which public sector net debt is rising. Despite that, the deficit in 2026/27 is now expected to amount to £80bn, up £48bn from the £32bn projected in the OBR’s forecast back in March, as summarised in the ICAEW chart of the week.
The Chancellor was fortunate that the OBR was more optimistic than other forecasters about the ability of the UK economy to recover from the recession in a couple of years’ time.
Changes in the OBR forecast for the deficit
The OBR forecast for the fiscal deficit has changed since March, with debt interest, a weaker economy, energy support packages and policy changes all increasing the deficit up until 2024/25 before tax rises and spending restraint partially offset these increases from 2025/26 onwards.
The OBR now expects the deficit to be £177bn in the current fiscal year (up £99bn from their previous forecast in March), £140bn in 2023/24 (up £90bn), £84bn in 2024/25 (up £48bn), £77bn in 2025/26 (up £42bn) and £80bn in 2026/27 (up £48bn).
This includes the £58bn and £25bn effect of energy and cost-of-living support packages in the next two years, which are expected to cost £37bn and £16bn once indirect effects (principally more tax receipts and lower welfare spending) are taken into account.
Receipts and expenditure
Receipts are now expected to rise from £1,005bn in the current financial year to £1,202bn in 2027/28, while expenditure excluding interest is expected to rise from £999bn in 2022/23 to £1,105bn.
Interest is expected to fall from £120bn this year to £77bn in 2025/26, primarily as the effect of inflation on index-linked debt is expected to fall and then reverse from its peak in the current fiscal year. Interest is then expected to increase to £102bn in 2027/28 as a growing level of debt adds to interest charges.
Net investment is expected to rise next year by around £5bn to £76bn after adjusting for a one-off credit in the current year relating to student loans. Investment is then expected to fall from next year onwards to £64bn in 2027/28, highlighting how spending restraint is likely to be borne from savings in capital programmes – at least assuming the plans remain unchanged following the general election expected in 2024.
Debt forecast to approach £3.0tn
Public sector net debt is now forecast to reach £2,963bn or almost £3.0tn by March 2028. This is £590bn higher than the £2,373bn reported at March 2022, £1,143bn higher than the £1,820bn reported for March 2020 at the start of the pandemic, and £2,396bn higher than the £567bn reported for March 2008 before the financial crisis caused borrowing to increase dramatically.
The legacy of the huge amounts borrowed over the course of a series of fiscal crises has severely weakened the public finances, at the same time as spending on public services has been constrained by policy decisions and economic growth has been weak.
The Chancellor will be hoping that the economy performs at, or even better than, the OBR forecasts, but he will be acutely aware that this is not a given and the public finances could easily be pushed off course by events.
• You can read more on this from Martin Wheatcroft FCA here: Autumn Statement: we’re going to need some bigger numbers.
On 17 November 2022, the Chancellor delivered the Autumn Statement. Read ICAEW's analysis and reaction.
Expert analysis on the latest national and international economic issues and trends, and interviews with prominent voices across the finance industry alongside data on the state of economy.Visit the hub
Cost of doing business
Insights, analysis and resources for organisations facing rising costs of doing business amid a multitude of challenges, including energy prices, inflation, supply chain disruption and staff recruitment and retention.Find out more
A look at how supply difficulties, rising electricity prices and sanctions against Russia are contributing to turmoil in energy markets and an examination of what businesses can do to lessen the impact.Read more