It shouldn’t come as a surprise but the tone of Treasury “sources” ahead of the Autumn Statement has been particularly downbeat as new prime minister, Rishi Sunak, struggles to fill the £50bn fiscal hole he inherited from Liz Truss.
It may be that the sources, which have heavily briefed the UK’s press in the past few days, are deliberately managing expectations down but given the state of the UK economy there are unlikely to be any rabbits being pulled out of any hats when chancellor Jeremy Hunt addresses parliament on 17 November.
The prime minister met with Hunt yesterday to plan the upcoming statement and a Treasury source said things were going to get “rough.”
Both Sunak and his chancellor reportedly agreed that “tough decisions” needed to be undertaken due to the “eye-watering” size of the blow to public finances dealt by Truss’s mini-budget.
“It is going to be rough,” the source said. “The truth is that everybody will need to contribute more in tax if we are to maintain public services. After borrowing hundreds of billions of pounds through Covid-19 and implementing massive energy bills support, we won’t be able to fill the fiscal black hole through spending cuts alone.”
So where will the money come from
There are few easy wins but one may be an extension to the existing windfall taxes on energy profits.
Sunak introduced a 25% Energy Profits Levy (EPL) in May and this levy could be increased and the timescale extended.
Speculation that a windfall tax could be extended to the banking sector has been downplayed but not discounted although putting further pressure on some of the UK’s leading financial institutions heading into a recession may not be the wisest move.
Otherwise, stealth increases in income tax and national insurance contributions are likely with a freeze on personal tax allowances and thresholds meaning more people pay tax and more are dragged into the higher rates.
A prolonged freeze on income tax thresholds could raise £4bn a year, it is estimated.
Public spending will also be under pressure and while Hunt has refused to be drawn on the specifics of the package he has signalled that neither the NHS nor defence spending are immune from potential cuts.
Paul Johnson, director of the Institute for Fiscal Studies, said the announcement will likely involve at least some cuts to planned investment and day-to-day spending in areas such as health, pensions, welfare, education and defence.
Public sector workers could also be a target for savings with The Times reporting that the Treasury was looking at pay rises of 2% across the board in the public sector for 2023-24, meaning real terms pay cuts across the board.
Another idea under consideration is prolonging the temporary cut to international development aid which Sunak had pledged to return to 0.7% of GDP. This may stay at 0.5% of GDP.
The political hot potatoes of pensions and benefits will also be an area of contention.
It would seem unlikely that benefits will not be raised in line with inflation given the new PM’s commitment to looking after the most vulnerable in society but the pensions triple lock could be under threat and there is growing speculation that this may be scrapped.
“The costs associated with maintaining the triple lock next year are likely to be eye-watering – which is undoubtedly the reason the UK’s latest chancellor, Jeremy Hunt, is reluctant to commit to the policy,” Tom Selby head of retirement policy at AJ Bell has said.
Selby said abandoning the triple lock in favour of an earning-linked increase could save the Treasury an estimated £4 billion to £5 billion a year.
However, you dress this up there are no easy answers and the gloomy pre-statement briefings may be a sign of things to come.