Autumn Statement Overview

It is usual in the early days following any Budget or Fiscal Statement to concentrate on the specific measures announced, or not announced, by the Chancellor.

Much of the immediate reaction to this Autumn Statement has surrounded the changes to National Insurance and it is interesting as to how reactions differ.

The positive position is to note that a 20% basic rate of tax along with a 10% rate of employee NI will give the lowest “combined tax rate” (30%) since the 1980s.

However, let us not draw our conclusion too quickly – fiscal drag, by not increasing allowances and tax bands in line with inflation, means that despite these headline reductions the total tax burden continues to increase.

Whilst both main parties seem to be aligned in sentiment that taxes need to be cut and the economy boosted, the difference in their approaches is how that is best achieved. Should it be weighted more to supply side economics, giving the private sector the environment in which to thrive, or in enhancing public services?

It may be, however, that the reality is neither party will have much scope to  implement their desired strategy.

Debt or Growth?

Many analysts fear that the UK finances are caught in a debt trap. Interest payments on the already high (and still increasing) debt levels need to be funded, and with inflation (though reducing) continuing to remain above target, the interest on that debt is accordingly higher. That interest is, of course, paid with tax receipts.

Reducing debt as a proportion of GDP (forecast to be 91.6% next year and 92.7% in 2024/25) can be achieved either by repaying some of the debt or by growing the economy such that, if debt remains at the same level it represents a smaller proportion of the increased GDP.

In terms of the former, we have just seen that when some unexpected ‘headroom’ arose, the Chancellor chose to reduce tax and give businesses incentives for growth than to use the funds to repay debt.

So that leaves growth. However, the forecast (including the measures announced yesterday) is for growth from 2024 to 2027 to average 1.5% pa (as opposed to the 2.1% forecast last March). At those levels growth will not be ‘riding to the rescue’ anytime soon.

The State of the Playing Field

When the Tories came to power they were left a note by the outgoing Chief Secretary to the Treasury saying “I am afraid there is no money…good luck!”

In the years that followed there was a concerted attempt to bring debt under control, however the Covid pandemic and lockdowns resulted in a body-blow that could not have been anticipated.

The Russian invasion of Ukraine then placed further stress on already weakened systems, not just that of the UK, and led to soaring inflation.

The Conservatives have not helped themselves (for example Partygate, the chaos of the Liz Truss leadership period) but it is difficult to judge their overall performance in relation to the economy due to there being so many external factors at play.

Regardless, the economy is where it is. Neither the Conservatives nor Labour have any silver bullets.

Where do we go from here?

If, as is largely anticipated, Labour does form the next Government they will inherit high debt, high interest payments and an economy undergoing sluggish growth as it tries to recover from multiple knocks.

Announcements already made by the Chancellor in relation to the freezing of personal allowances and the higher rate tax threshold run through to 2028. All of the forecasts for the next few years already incorporate the effects of these. If an incoming Labour Chancellor wishes to unfreeze any of those they will need to find considerable additional tax revenue from elsewhere to fund that.

I have seen Jeremy Hunt’s speech yesterday described as ‘having put the best gloss on it that he could’ – it may be that in the immediate future that is the best that anyone, from either party, can do.