Chancellor of the Exchequer Jeremy Hunt attempted to bring stability back to the markets with an Autumn Statement driven more by threshold freezes than major tax increases.
While it avoided any dramatic moments by announcing seemingly modest tax increases and spending cuts, a deeper look into the plans and forecasts reveals a difficult picture for the UK in the coming years. The Office for Budget Responsibility (OBR) forecast indicated the largest decline in living standards since records began.
Rather than deep and fast spending cuts, the Statement set out plans to slow down the rates of government spending increases. The Chancellor committed to investing in energy (including the Sizewell C nuclear power plant), infrastructure and retooled investment zones, and reiterated the government’s commitment to reducing carbon emissions by 68% by 2030.
“The Chancellor set out a bleak picture, but not as bleak as we had been led to believe,” says Iain Wright, ICAEW’s Managing Director, Reputation and Influence. “Nevertheless, on today’s OBR forecasts, we’re going to see the biggest fall in living standards since records began. The pandemic, and war in Ukraine, have had a huge impact on the UK economy. In terms of our ability to withstand another economic shock, the cupboard is bare.”
In his speech, the Chancellor spoke of his aim to achieve Scandinavian levels of public services with Singaporean levels of efficiency. Wright believes that this statement is misleading – a cut in costs will have some kind of effect on service quality.
“The NHS will see increases of about 2%, but with high inflation, pressures on capacity and an ageing population, the resilience of the service to provide levels of suitable and safe care will be placed under enormous pressure.”
The investment commitments included in the statement should be welcomed, says Wright, but more must be done to address low business investment forecasts. The OBR forecast indicates that government investment will act as a drag on GDP growth after 2025, which will also need to be addressed by the government in power after the next General Election.
Public sector net debt in March 2027 is now expected to reach £2,872bn, £392bn more than the £2,480bn forecast at the time of the Spring Budget earlier this year. This further increases public finances’ exposure to higher interest rates, adding to the challenges facing the public finances over the rest of the decade, says Martin Wheatcroft FCA, external adviser on public finances to ICAEW.
“Despite the measures taken in the Autumn Statement, the shortfall between receipts and public spending is expected to be much higher than originally anticipated over the medium term, with a forecast deficit of £80bn in 2026/27, £48bn higher than the £32bn forecast prior to the mini-Budget. Tight spending constraints leave very little room for manoeuvre if the recession turns out to be deeper, or the subsequent recovery weaker, than hoped for in these numbers.”
The Chancellor announced threshold freezes to income tax, NIC including employer NIC and inheritance tax (IHT) for an additional two years, until April 2028. Elsewhere, the threshold for the 45p rate of income tax will be reduced in April 2023, from £150,000 to £125,140, bringing more people into the higher rate band of tax.
The dividend allowance will be halved from £2,000 to £1,000 from April 2023 and again to £500 in April 2024. Similarly, the capital gains tax (CGT) annual allowance will reduce to £6,000 in April 2023 and to £3,000 in April 2024.
The freezes will have a gradual effect on the amount of tax that businesses and households will pay over time, bringing more people into higher tax bands, due to changing factors such as average earnings, the Retail Price Index (RPI) and the Consumer Price Index (CPI). The tapering of various thresholds and allowances will also inevitably add complexity to the tax system.
“The tax measures announced today will bring more people into higher tax bands and add more complexity to the system for many taxpayers,” says Frank Haskew, Head of Taxation Strategy for ICAEW. “The most obvious change – the reduction in the threshold for the highest earners – will bring more people into higher rates of income tax over the next five years, but frozen allowances and bands, the reduction in the dividend allowance and capital gains exemptions will also lead to taxation by stealth.
“Many taxpayers will find their tax becomes more complex and this will be more difficult for HMRC to administer at a time when its services are under considerable pressure.”
The Chancellor also announced that the energy industry will have to pay a higher windfall tax of 35% instead of 25%, and introduced a 45% levy on electricity generators. Electric vehicles will no longer be exempt from vehicle excise duty from April 2025.
The Chancellor announced that public spending will now increase more slowly. Spending Review settlements to 2024/25 will be honoured in full, but departments will be expected to find efficiencies. Day-to-day spending will increase more slowly in 2025 onwards, and capital spending will be maintained at current levels in cash terms.
He committed to increasing the schools budget by £2.3bn per annum from next year, and adding £3.3bn to NHS funding each year for two years. Social care spending will increase by up to £4.7bn in the same period.
The Chancellor also said that, as a result of government tax and spending decisions, funding for devolved nations is increasing by approximately £3.4bn over 2023-24 and 2024-25 through the Barnett formula and agreed tax and welfare Block Grant Adjustments.
The measures announced in the budget will only plug some of the shortfall between receipts and public spending as the economy enters recession, putting public finances under strain. The switch in fiscal rules away from achieving a current budget surplus to keeping borrowing below 3% of GDP highlights the lack of resilience in public finances, says Alison Ring OBE FCA, ICAEW Director of Public Sector and Taxation.
“With fiscal drag on both tax receipts and public spending being used to do a lot of the heavy lifting, and a number of reviews launched today, the likelihood is that further measures should be expected in the Spring Budget to further stabilise the public finances.”
The Autumn Statement will mean difficult spending decisions for many public bodies, but it is important that they do not make false economies by cutting back on important back-office functions, says Ring. Financial and risk management, procurement, financial reporting, internal and external audit, and – importantly – fraud prevention are critical for an effective public sector, she explains. “Investing in strong finance functions and in high quality financial reporting to aid decision-making will be critical to ensuring that public money is spent effectively at a time of tight spending settlements.”
Energy and investment
The Chancellor committed to maintaining the Energy Price Guarantee, albeit on less generous terms. The £2,500 cap on typical energy bills will increase to £3,000 by April. Businesses hoping to see more clarity on what happens to the Energy Bill Relief Scheme (EBRS) from April 2023 were also disappointed. Public sector bodies will also be affected once EBRS comes to an end.
“Members in some of the most challenging and energy-intensive sectors, including manufacturing, need certainty, especially on this issue,” says Simon Gray, ICAEW’s Head of Business.
The Chancellor committed to investing in UK energy supplies, announcing a £700m investment into the Sizewell C nuclear power plant, and a pledge to reduce energy consumption by households and businesses by 15% through energy efficiency schemes, the details of which were not announced.
Commitments to the Northern Powerhouse and HS2 rail projects were maintained, as was the gigabit broadband rollout. The second round of the Levelling Up Fund will distribute at least £1.7bn to local infrastructure projects. Further regional devolution, with elected mayors in Suffolk, Cornwall, Norfolk and the North East, was also announced. The Chancellor recommitted to the £20bn research and development budget.
This focus on energy infrastructure and innovation is welcome, but needs detail, says Gray. “The Chancellor laid out a commitment to devolution deals, but how these work in practice with levelling up, investment zones and other initiatives is still unclear. Much hinges on getting inflation under control to protect the purchasing power of budgets. The OBR forecasts the UK inflation rate to fall to 9.1% this year and 7.4% next year. For businesses navigating the challenges posed by shortage of skills and spiralling wage inflation, alongside challenges associated with raising prices, the squeeze could be too much to bear.”
Richard Spencer, ICAEW Director, Sustainability, says: “It was good to hear the Chancellor reaffirm that the UK ‘remains fully committed’ to the ambition of the Glasgow Climate Pact agreed at COP26. Equally, the ambition to reduce energy consumption by the UK’s buildings and industry by 15% against current levels is to be welcomed. However, no new spending was announced in this Parliament, and there was no detail about how these ambitions will be achieved.
“The green light for Sizewell C is all about energy independence and, like Hinkley Point C, which is delayed and over budget, there remains concern about its ultimate cost.”
A large-scale challenge
The Chancellor’s statement further highlighted the scale of the challenges facing the country as we enter recession, according to ICAEW’s Director, Economies, Suren Thiru. Rising unemployment and falling business investment pose a real threat to long-term economic recovery, he says.
“The business rates relief package will help many struggling firms, who are feeling the brunt of soaring inflation. With energy bills set to rise sharply next year, a lack of clarity over continued financial support for businesses after April will result in more uncertainty and diminish confidence further, adding to the downward pressure on business activity and investment.
“Rising inflation, interest rates and energy bills are clobbering people’s incomes, which are set to fall by more than 7% over the next two years. This is the biggest fall on record, and could mean this downturn is even more damaging than the OBR predicts.”
On 17 November 2022, the Chancellor delivered the Autumn Statement. Read ICAEW's analysis and reaction.
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