There could still be some shocks when Jeremy Hunt delivers the Autumn Statement, which could confirm some pain for investors and listed companies in several sectors.
Many measures have already been reported, and any announcements that are not already known are likely to be leaked this weekend, with new prime minister Rishi Sunak well known for sharing most of his budget with friendly newspapers ahead of time when he was chancellor.
While Hunt will be the one with the red despatch box, he has already set out his view that some major fiscal tightening is needed and that “eye-wateringly difficult” decisions on tax hikes and spending cuts are needed.
With the economy potentially already in recession and the statement likely to see the most severe budgetary tightening since George Osborne’s austerity Budget of 2010, this makes it all the more likely that the most punitive measures will be reported in advance to take some sting out of the day.
But some of the most severe ‘rumours’ may not make it into the final proclamations – especially if the reaction among the public or Tory voters outweighs the potential benefit.
This means, despite all the leaks, paying attention to the statement will be important.
What to expect
With Hunt apparently needing to plug a fiscal gap or ‘black hole’ between £35bn and £60bn, we’ve been forewarned that the split of public spending cuts will outweigh tax rises.
Based on leaks, speculation and rumours, here’s some of the details to look out for:
- confirmation on the estimated size of the fiscal gap will be key
- also, whether the government goes hard with lots of early action or if it plans more aggressive tightening after 2024 when the economy is expected to be bouncing back, or perhaps tilting the mix of spending cuts and tax rises to create a smaller drag on the economy
- a longer freeze to income tax allowances, a ‘stealth’ tax as thresholds will not rise in line with inflation
- lowering the threshold for the top 45p rate of income tax below the current £150,000
- reinstating the 50p rate top rate
- another stealth tax from widening the net for inheritance tax, with the ‘nil-rate band’ frozen from 2025-26 to 2027-28
- as well as potentially raising the 10% capital gains tax on investments and 18% CGT on property, Hunt is reported to also want to halve the capital gains tax-free allowance from £12,300 to just over £6,000, which would mean many thousands of investors, landlords and second home-owners would pay it for the first time.
- Hunt has already reinstated the planned increase in corporation tax rates to 25% next April (which Liz Truss and Kwasi Kwarteng had momentarily nixed)
- but a big increase in bank taxation is unlikely, as although Hunt has not yet made a move on the current 8% bank surcharge, Sunak is reported to want to cut this to 3%, though the rise in corporation tax will mean banks still pay more than they currently do
- one corporate ‘stealth tax raid’ could be on small businesses, by holding the threshold at which businesses must register to pay VAT at £85,000 of turnover until 2026, instead of raising it in line with inflation
- a multi-year freeze to spending on defence and other departments has been mooted
- a bigger windfall tax on oil and gas producers is possible, or with a new structure. also the tax and support for electricity generators and renewable energy companies is likely to be tweaked.
- somewhat of an escape for pensioners and benefit claimants, with welfare payments and pensions to rise with inflation.
- sinking the plan for the “HMS Brexit”, a £250mn flagship yacht that was intended to drive trade deals around the world.
- there may be another delay of Boris Johnson’s planned cap on social care costs
- Many households and economists will also be looking out for further detail on what the government intends to do about the energy price guarantee. As PM Liz Truss said the price cap will last for two years, but Hut has said it will be scaled back from April, which could mean most households will be shifted back to the Ofgem regulated price, which economists at ING estimate will average £3,300 annually based on current futures prices compared to the current £2,500 average at the government-guaranteed level.
How much austerity is really needed?
Discussion ahead of the statement has been dominated by talk of “fiscal black hole” in the public finances, which has been calculated at between £35bn and £60bn, which the narrative goes, must be patched over with spending cuts or tax rises.
If it is at the upper end of that scale, or around 2% of gross domestic product, it could risk the recession being deeper than forecast and stretch beyond 2023.
However, a group of anti-austerity economists have said the ‘black hole’ is closer to the bottom end of the scale, and could even be a surplus depending on how the deficit is calculated.
“There is now a consensus among economists that austerity does significant damage to an economy's potential, undermining growth, as the experience of the last decade in Britain has shown us," said economist Rob Calvert Jump of the Progressive Economy Forum.
“Further austerity will do far more damage than a 'fiscal hole' that disappears with tweaks to models or accounting rules.”
There was agreement from within the City.
“This fixation on what to all intents and purposes is an imaginary black hole, premised on a host of false assumptions is likely to be hugely damaging to the UK economy," said Michael Hewson, market analyst at CMC Markets.
“ The market didn’t care when the government was spending almost £350bn on various Covid support measures in the previous fiscal year, yet we are supposed to believe that suddenly there’s huge concern about a £35bn fiscal hole that the government suddenly need to plug.
“The UK government doesn’t have to embark on a host of spending cuts on big infrastructure projects which are sorely needed if they are serious about levelling up.
“They simply have to convince the markets that they have a credible long term economic plan they can implement over a 5–10-year period, rather than impose a plan that no other country in Europe is pursuing. And where countries like Germany are spending billions of euros more in supporting their economies without any penalty when it comes to borrowing costs."
Ashley Webb at Capital Economics agreed that with the fiscal tightening coming just as the recession begins, there is a risk that the fiscal consolidation deepens the recession.
But it may just mean interest rates “won’t need to rise quite as far to bring inflation back down to the 2% target”, he said. “Much depends on the composition and timing of the fiscal tightening announced.”
His colleague Ruth Gregory said she suspected the Autumn Statement will probably have to incorporate tightening measures worth around £54bn, but that Hunt will “tilt the balance” to tax hikes and have most policies starting later rather than sooner, which “would make a lot of political sense” and “is the right fiscal judgement from the perspective of the economy too.”
James Knightly at ING said that while reports suggest the Treasury will rely more on spending than taxes to do the heavy lifting, “given the real-term cuts (in some cases sizable) already facing certain government departments, it may be that this means more noticeable cuts to investment spending”.