Autumn statement 2022: Restoring the UK's credibility

The Chancellor needed to find around £55 billion. First, were a range of tax increases: the Chancellor shifted the threshold at which the top 45p rate of income tax becomes payable. There were also cuts to the allowances on dividend income, and a significant reduction in the tax-free allowance for capital gains tax (from £12,300 today, to £6,000 next year, and £3,000 in 2024) [1].

For businesses, the key announcement was an extension of the current windfall taxes on energy companies to 35% and a 45% temporary levy on electricity producers [2]. This includes ‘low carbon electricity generators’, including wind, solar and nuclear.

The spending cuts were not as severe as some of the gloomier predictions. The much-debated ‘triple lock’ for pensions remains in place. Real spending on public services will continue to increase, but at a slower rate. Spending on education, the NHS and social care is set to increase.

Several measures aimed at supporting the cost of living were also announced, including an extension of the Energy Price Guarantee for another 12 months. However, the terms were less generous. 

The Chancellor did not lose sight of his predecessor’s growth ambitions. In the longer term, the economy needs to grow and there remains a danger that a higher tax burden stymies that growth. To mitigate this, the Chancellor announced £14 billion of tax cuts on business rates, plus investments in infrastructure. He confirmed the building of a new nuclear power plant at Sizewell C and an increase in the research and development budget.

He also announced reforms to the Solvency II rules, which will loosen regulation on insurance company investments. The hope is that this will unlock ‘tens of billions of pounds’ of investment capital that can be pushed into the UK economy to create growth.

Not quite. The £55 billion hole in the UK’s finances is to be met by a combination of spending cuts and tax increases, in a ratio of approximately 55% to 45% respectively. In 2010, George Osbourne funded 80% of the Government’s financial hole from spending cuts and 20% from tax rises.

The Chancellor treads a difficult and narrow path between reassuring financial markets about the state of the nation’s finances, to keep borrowing costs under control, while not inflicting too much pain on individuals and public services given the shaky economic outlook. The Office for Budget Responsibility (OBR) said the UK economy was already in recession and forecast further weakness in 2023, with economic output dropping 1.4%.

The outlook for the consumer remains difficult. The OBR predicted house prices would fall 9% between the fourth quarter of 2022 and the third quarter of 2024, from a combination of higher mortgage rates and the economic downturn [3]. This will hit confidence. Households are likely to be worse off for two years in row, with disposable income set to dip 4.3% in the 2022/23 tax year.

However, it does appear that the Chancellor has achieved his primary aim, with financial markets’ reaction to the Statement proving relatively muted. The yield on government bonds – typically a barometer for the credit-worthiness of the UK Government – remained largely unchanged, having already dropped a long way following its spike after Kwasi Kwarteng’s ‘mini-budget’. Sterling dropped slightly but has increased 14% since its low point relative to the US dollar on the 26 September [4].

After some initial volatility, energy companies and electricity producers also shrugged off the announcement and the UK stock market was largely flat on the day.

There is no doubt that the economic backdrop for the UK remains extremely difficult. The Chancellor may have avoided the mistakes of his predecessor, but there are still external inflationary pressures and CPI is likely to stay well above the Bank of England’s 2% target throughout next year.

In keeping the gilt yield stable, the Chancellor has succeeded in ensuring mortgage rates don’t spike higher and heap more pressure on household finances. Equally, the worst of the tax rises come in 2024, rather than immediately, which should help ease short-term pressures on households.

The Chancellor has done enough to calm markets, but in the longer term he needs to generate economic growth. That is likely to prove more difficult.

Sources

[1] Autumn Statement 2022: Key points at-a-glance, BBC News, 17 November 2022

[2] Chancellor extends energy windfall tax to ‘low carbon’ generators, The Guardian, 17 November 2022

[3] Autumn Statement live: UK house prices to fall until 2024, OBR says, Financial Times, 17 November 2022

[4] Pound Sterling to US Dollar Exchange Rate chart, XE.com [accessed 17 November 2022]