The Autumn Statement was delivered against a backdrop of improving economic news, something that Chancellor Jeremy Hunt went out of his way to repeatedly emphasise during his speech.
Inflation is down to 4.6%, the widely anticipated UK recession has not materialised, and the Chancellor was at pains to point out that the country’s economic performance and outlook has improved significantly since his last update in the Spring.
Whilst encouraging, many political commentators were quick to point out that the numbers have only picked up in the short term and that the longer-term forecast is, in fact, more gloomy than previously published.
The Office for Budget Responsibility (OBR) now forecasts that the UK economy will grow by 0.6% this year, compared with the March forecast of a 0.2% contraction.
But that’s where the good news ends.
The OBR forecast for 2024 and 2025 is significantly worse. They now expect growth of just 0.7% and 1.4% respectively, compared with forecasts of 1.8% and 2.5% just 8 months ago.
The forecast for 2026 is marginally lower, and for 2027 marginally higher.
Overall the picture is one of ‘slower growth from a higher starting point’ which means that, by the end of 2027, the UK economy should be 0.6% larger than the OBR forecast in March 2023.
Mr Hunt also referenced that the OBR had calculated that this meant that he had £27bn in ‘fiscal headroom’ (essentially how much money the Treasury has for tax cuts or spending increases within its own rules) which allowed him to take steps to cut taxes.
He didn’t mention that the OBR also said that he has now spent almost all of this through the measures he announced today.
Also missing from the statement was that the OBR now expects both inflation and interest rates to stay higher for longer than it anticipated in March; much higher when it comes to inflation, which they now expect to be above 2% until the second quarter of 2025 - previously they had forecast that inflation would be 0.9% by that point.
The headline grabbers
As with all Statements and Budgets, the headline grabbers are the things that are included in the Chancellors' speech and the less interesting (some say less appealing) bits and pieces are left to be found in the small print.
This year, the big ticket items are:
Employees' National Insurance will be cut from 12% to 10% on all earnings between £12,571 and £50,271.
Class 2 National Insurance which is paid by self-employed people will be abolished, saving them £3.45 per week.
Class 4 National Insurance contributions, also paid by the self-employed, will be cut from 9% to 8%
The National Minimum Wage will rise from £10.42 to £11.44 per hour in April next year
The State Pension will increase by 8.5% next April, maintaining the Triple Lock policy for at least another year
The tax break that allows businesses to offset investment in machinery, IT and equipment is being made permanent.
Alcohol taxes have been frozen.
Overall it is thought that the reduction in employees' National Insurance will see around 27 million people pay less with someone earning £35,000 per year saving more than £450.
Self-employed people should see an average saving of £350 per year and the state pension will increase to £221 per week from April 2024.
Niyi Idowu, Partner at ATN Partnership said:
“As with any political statement, there is always a fair amount of spin that we need to wade through. The Chancellor has declared that this budget represents ‘the biggest package of tax cuts since the 1980s’, but that's not exactly accurate.
The policy of maintaining the freeze in tax allowances means that the tax burden continues to rise and will still hit a post-war high by 2029.
The reductions in National Insurance are welcome, but more than offset by the effect of fiscal drag, that's why the Chancellor chose to reduce National Insurance, not Income Tax.
What is good to see is that the temporary allowance for investment in things like equipment and plant and machinery, Full Expensing as it’s known, has now been made permanent - that is welcome”
Shevaun Haviland, Director General of the British Chambers of Commerce said:
“We are pleased the Chancellor has listened to our calls to help businesses deal with the current economic challenges.
The decision to make full expensing permanent will be a boost to companies wanting to invest. Our research shows that 34% of businesses have already benefited from the policy, rising to 47% for manufacturers”.
On the flip side of the coin, government spending will take another hit.
The Chancellor was opaque in his comments, stating that the government would take a “responsible approach” whilst focusing on “tacking waste”.
Looking in more detail at what the Office for Budget Responsibility (OBR) had to say reveals that spending on public services is set to fall by £19bn this year, after adjusting for inflation.
In short, this means that many government departments will not be able to keep up with inflation.
Sharshini David, Chief Economics Correspondent at the BBC commented that in order to maintain the same level of resources ‘the chancellor would have to find an extra £20.5bn a year by 2029 - almost exactly the size of his giveaway on tax and other items that year’.
Other key takeaways:
The UK will maintain its NATO commitment of spending 2% of GDP on defence
Borrowing will fall from 4.5% of GDP this year to 1.1 by 2029
Debt is forecast to continue to fall as a percentage of GDP
All in all, this was a bit of a ‘leveraged’ budget.
Nothing for the owner-managers of limited companies, a bit of a drink for employees and those who are self-employed and a healthy increase in both benefits and the state pension.
The big announcements were all around funding for investment with manufacturing receiving a £4.5bn funding package designed to ‘leverage many times that from the private sector”.
Tahmina Ahmed, Senior Client Manager at ATN Partnership, said:
“I’m happy to see that the business rates relief for hospitality, retail and leisure has been extended, which was really important for many of our clients.
Also, the announcement that large businesses who tender for government contracts will have to prove that they are paying small businesses on time was an unexpected but extremely welcome step towards alleviating some of the cashflow problems that many smaller businesses face”