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Autumn Statement: short-term gain, medium-term loss

Author: ICAEW Insights

Published: 22 Nov 2023

The Autumn Statement included several measures that are welcome news for businesses, but the medium-term outlook looks less positive.

The Chancellor of the Exchequer Jeremy Hunt announced that the super-deduction of 100% on capital allowances introduced in May 2021 will now be made permanent as part of a package of 110 measures to stimulate business growth and investment. 

However, the Office for Budget Responsibility (OBR) forecast downgraded estimates for economic growth in the medium term; real GDP growth is forecast to average 1.5% between 2024 and 2027, 0.6 percentage points weaker than forecast in March. 

The package of announcements in the Autumn Statement is expected to add around £17bn a year on average between 2024/25 and 2025/26 and raise GDP by an average of just under 0.3% between 2024/25 and 2028/29.

Elsewhere, the Chancellor announced a fourth consecutive freeze in the small business multiplier for business rates, and extended Retail Hospitality and Leisure (RHL) relief. Planning reforms, movement to reduce late payments, and cuts to NICs were also announced. 

“The Chancellor has implemented a package of sensible measures that should assist in advancing higher levels of growth, but the disappointment stems from the fact that these measures don’t seem to be shifting the dial on growth rates at all,” says Iain Wright, ICAEW’s Managing Director, Reputation and Influence. “We have moved from a situation where the long-term annual growth rate since the Second World War was about 2%, and now it has barely reached 1%. This seems to be the situation for the rest of the decade and shows the Treasury’s limited room for manoeuvre, hemmed in by high inflation, high interest rates and relatively weak public finances.”

Business growth measures

The Chancellor announced a Backing British Business plan comprising 110 measures designed to stimulate business growth, the biggest being the permanent full expensing of capital expenditure. Companies across the UK will be able to claim 100% capital allowances for qualifying main rate plant and machinery in the year of investment. This is covered in more detail in a separate article.

This has been largely well received by the business community so far, which is looking for certainty, says ICAEW Head of Business Simon Gray. “It brings longer-term visibility and viability to investment decisions.”

The 12-month extension on relief for business rates offers reassurance for members running retail, hospitality and leisure businesses, but only temporarily delays April’s cliff edge, says Gray. 

With many small businesses calling for action on late payments at a time where they have increased, the Chancellor announced the publication of the Payment & Cash Flow Review Report. He said that the public sector will “lead by example”, with firms bidding for government contracts over £5m required to demonstrate that they pay within an average of 55 days from April 2024. This will reduce to 45 days in April 2025 and eventually to 30 days. 

“Timely cash collection is key for the survival of small businesses,” says Gray. “The requirement placed on large businesses bidding for public sector contracts to meet 55-day payment terms with their supply chains will help but doesn't go far enough to address the broader challenges of late payments.”

The R&D Expenditure Credit (RDEC) and SME schemes will merge from April 2024 onwards. The rate of tax for loss-making companies within the merged scheme will fall from 25% to 19%. The intensity threshold in the R&D intensives scheme will reduce from 40% to 30% for accounting periods that start on or after 1 April 2024. Companies that dip under the 30% threshold will also continue to receive the relief for an additional year.

Expressing a desire to see the UK become an “AI powerhouse”, the Chancellor announced £500m to fund new investment centres to further development of Artificial Intelligence in the UK.

Josephine Muncaster, Finance Director for machine learning company digiLab, felt that the measures for business included in the Autumn Statement were lacking. “A lot of the items announced won’t impact us as a business and are unlikely to impact our growth,” she says. “I’m disappointed that they haven’t demonstrated any investment plans to significantly improve the R&D tax claim system beyond their existing plans to merge them, and there was no recognition of the state that HMRC is in.”

Regarding the £500m for innovation centres focused on AI development, Muncaster says that it will make little difference: “OpenAI in the US (just one of many US AI companies) has raised $11bn over its lifetime. Our UK capital markets don’t invest at this level. While pension reform for the BBB might pump some extra funding into capital growth, it will still be very conservatively invested.”

The Chancellor announced £4.5bn of spending over five years to attract investment in green energy and advanced manufacturing. “This is a step in the right direction but is limited compared to incentives available overseas,” says Gray.

“It is good to see full expensing made permanent as this removes uncertainty (so long as Labour don’t threaten to reverse it) and should help investment by business,” says Andrew Coulson, Client Finance Director at My Finance Team. “Assuming of course that SMEs have or can raise the funds, which is often a struggle. While the Chancellor says it’s the ‘biggest tax cut in history’, the Corporation Tax hike from 19% to 25% will cost business more than the benefit of full expensing. This move will probably benefit large businesses more than SMEs.”

Working with tiny headroom

The additional funding for tax cuts has been funded through higher tax receipts due to inflation, says Martin Wheatcroft, external advisor on public finances to ICAEW. “Doubling tiny headroom is still tiny headroom,” he says. “Unrealistic spending forecasts are now even more unrealistic, with the Chancellor trying to have his inflationary cake and eat it by hoping to prevent spending on public services rising to the same extent as tax receipts. Debt interest, pension and benefits uprating, and tax cuts have absorbed most of the inflationary benefit, leaving very little for public services that are already under significant pressure.” 

A relatively small amount of funding for a series of business growth initiatives to improve productivity are unlikely to shift the dial in the medium-term, even if positive for the economy, he says. “Public sector investment – for example, in infrastructure – is frozen, which is not positive for long-term business investment, even if full expensing helps a lot.”

The Chancellor did not comment on the additional £115bn set to be added to the bill for debt interest in the next five years, says Alison Ring OBE, ICAEW Director of Public Sector and Taxation. “With the need to service this increase, his business growth plan received relatively little funding beyond changes to national insurance and full expensing. 

“Freezing public sector capital expenditure over the next five years also means the Chancellor is relying on the private sector to deliver the additional investment needed to shift the dial on economic growth.

While inflation may have boosted tax receipts, there hasn’t been a commensurate increase in public service budgets, Ring explains. “Aspirations to constrain public spending are highly likely to be disappointed. More importantly, there is still no fiscal strategy to address the big challenges facing the public finances over the longer term, so fiscal illusions undoubtedly remain.”

NIC cuts

The headline rate of National Insurance Contributions (NIC) will be cut by 2% to 10%. This will be introduced from 6 January. The flat rate class 2 NIC will be abolished for self-employed individuals with profits above £12,570. The class 4 rate of NIC will be reduced from 9% to 8%. This is covered in detail in a separate article. “The cut in national insurance will only make a small dent in the squeeze on people’s incomes given that many are being dragged into higher tax bands by the freeze on thresholds,” says Suren Thiru, Economies Director at ICAEW.

Skills, welfare reforms and Living Wage increases

Elsewhere, the Chancellor announced an increase in the National Living Wage to £11.44 an hour, which may be an issue for some sectors, such as hospitality. A fund of £50m will be made available to pilot ways of increasing apprenticeships in key growth sectors. A combination of health and wellbeing support, incentives and punitive measures were announced to encourage people off of welfare and into work.

“Action on skills, business rates and late payments will also help businesses that continue to face a significant squeeze on their finances and ability to grow,” says Thiru. “The acid test of these myriad supply-side measures will ultimately be whether they are able to meaningfully increase the UK’s growth potential, otherwise we will remain more exposed to future economic shocks and living standards will remain constrained.”


Autumn Statement

On 22 November 2023, Chancellor Jeremy Hunt delivered the Autumn Statement. Read ICAEW's analysis and reaction.

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