It used to be that we’d only find out about the government’s plans for taxes and spending once a year, but we’re now anticipating our third ‘fiscal event’ in as many months.
Following the disastrous mini-Budget under Liz Truss and Kwasi Kwarteng, we were expecting a brand new Budget on Halloween under new Chancellor Jeremy Hunt, but that was knocked back shortly after the last Prime Minister was outlived by a lettuce.
While the previous ‘fiscal event’ was characterised by unfunded tax cuts and the Halloween Budget was expected to simply reverse all of those decisions, many expect the new Autumn Statement to go in a very different direction.
Now, we’re expecting something of a 50:50 split between tax rises and spending cuts with many changes Liz Truss wrote off just a few weeks ago now almost a done-deal.
Before we explore the rumoured and leaked announcements for Sunak and Hunt’s impending Statement, let’s take a look at the situation we find ourselves in.
Back in 2007, the pound was worth two dollars - now, it’s worth just $1.14, having sunk by 26 cents since the start of the year. Meanwhile, national output is lower than it was at the start of the pandemic, property prices have started to fall, inflation is rapidly outstripping wage growth and energy bills are double what they were a year ago. Britain stands out as the worst performing economy in the G7 and the Bank of England has warned the UK has already begun its longest ever recession.
British politics has never been this turbulent and the economy hasn’t looked this dire in a generation, so it’s no wonder that the business leaders we work with are crying out for some sort of certainty. While the economy has suffered, we’ve had tax cuts snatched away just days after they were offered, and we’ve had U-turns on U-turns, so we’re desperate for sensible interventions.
Currently, the only two announcements from September’s Mini-Budget to remain on the table are the reversal of the 1.25% National Insurance rise and the extension of stamp duty exemption to properties worth up to £250,000 (or £425,000 for first time buyers). Everything else from Kwarkeng’s budget has been cancelled.
Fundamentally, that gives Jeremy Hunt something of a clean slate to announce policies which offer a realistic means to put government spending on a more sustainable footing while accounting for the dramatic shift in inflation. Whether this means a return to austere spending cuts, tax rises or incentivisation for growth is up to him and the Prime Minister, but they have to do it without further scuttling the economy as their predecessors did.
Tip-offs and leaks to journalists from anonymous sources have already shed some light on what might be in the Autumn Statement and it seems that so-called stealth taxes are going to be a major tool to restore fiscal credibility.
Mainly, this will be occurring through the process of fiscal drag, which has become more lucrative following the rise in inflation. In essence, this is when tax thresholds and budgets do not rise in line with inflation, meaning that, in real-terms, they are lowered as the value of the pound falls. Politicians like this because, on the face of it, they aren’t raising taxes or cutting spending so they can shrug off some of the blame.
It’s expected that every personal tax threshold will be frozen, including income tax, national insurance, inheritance tax, pensions lifetime allowance and VAT will also be frozen, meaning millions more people will find themselves subject to higher taxes as a result of inflation. We also anticipate that the £12,300 tax free allowance on Capital Gains Tax will be halved and the special levy and banks will remain at 8% rather than being cut as planned.
To balance the books, it’s thought the government will need to make up a £50-60bn shortfall, and these tax rises are likely to go a long way toward filling that ‘black hole’. Government figures suggest that freezing income tax allowances and thresholds alone will raise £6bn by 2028, but the think-tank Institute of Fiscal Studies says this is more likely to raise £30bn due to the high rate of inflation, making these a very lucrative set of discrete tax cuts to look out for.
More transparent tax rises include corporation tax, which Mr Hunt has already re-confirmed will rise to 25% in April which is perhaps not surprising given that it was originally planned by prime minister Rishi Sunak when he was chancellor, and there’s speculation that the rate of dividend tax will indeed rise by 1.25%. As a result of these, it’s been reported that the owner of a limited company with a turnover of £50,000 could end up paying £5,000 more in tax than an employee on the same salary. This would therefore be a very unpopular move among the owners of SMEs - especially since the dividend allowance might also be halved.
There is one tax however which the government might be keen to draw attention to - an expanded windfall tax on the profits of companies producing energy and extracting oil. The public, and some energy bosses, have been calling for a bigger tax on the bumper profits companies are making from the energy crisis and we expect that this will be scaled up in value and in scope. While the tax may rise by five percentage points, it may also encompass profits from the sale of electricity produced on wind, solar and nuclear power which have also risen due to demand for gas and oil.
Just as inflation can enable tax rises through stealth, it also allows the chancellor to cut public spending while acting as if nothing has changed. While cutting departmental budgets and the money spent on public services might be viewed with hostility, freezing these budgets or raising them at a lower rate than inflation would amount to real-terms cuts of up to 10.5% if inflation remains at this level.
The consequence of this is that, with workers across the public sector including nurses, teachers and junior doctors voting for strike action over pay, this would make with-inflation pay rises almost impossible.
It’s also possible that benefits and universal credits won’t be rising with inflation either, instead, it’s rumoured that it may increase in-line with wage growth which has been much slower, meaning another real-terms cut.
We also don’t expect to see a significant increase in the minimum wage or National Living Wage. The Low Pay Commission has advised raising NLW by 8.6% next year and 6.1% by 2024 but there will be reluctance to accept this for fear it will contribute to inflation.
However, by failing to raise NLW, increasing public sector pay in line with inflation and cutting benefits in real-terms, the government would be putting millions of people in real hardship, including poverty. We’re already seeing reports of nurses relying on foodbanks so the government may have to embrace ‘compassionate conservatism’ in this regard or risk the consequences.
Following pressure from tabloid newspapers however, I’m confident that the pensions triple lock will remain in place, so at least some will see incomes rise with inflation, even if they are already better off than younger people.
I’ll be watching the Autumn Statement closely on Thursday 17 November and I’ll be sharing my thoughts on the day and in a special post-Statement webinar on Friday 18 November when I’ll host a panel of Duncan & Toplis experts to provide a detailed summary of the announcements and what they mean for individuals and businesses in our region.
Please click here for details on how to join this webinar.