- The focus and the tone of the Statement was constructive, aimed at boosting growth and on the supply-side. The economy is in a fragile situation and thus the Statement provided a welcome fiscal boost to the economy focused on demand and investment.
- Despite this, though, the growth outlook is still weak and further stimulus will be needed next year, in terms of a fiscal boost in the March 2024 Budget and interest rate cuts in the second half of next year, as inflation decelerates further.
- One of the main highlights was a large capital allowance for business, with full expensing being made permanent. This allows firms to deduct capital expenditure from taxable profits. This should boost investment, with the Office for Budget Responsibility (OBR) expecting this will boost investment by £3 billion per year. Despite this welcome measure, though, the OBR is still forecasting total fixed investment (public and private) to fall in 2024 and 2025 before then rising.
- A perennial problem for the economy has been low investment. I have been writing about this in the national press since the late 1980s. Thus, today’s announcement that full expensing would be made permanent was undoubtedly good news. Last autumn the rise in corporation tax undermined the UK’s competitiveness, and the Chancellor went some way to try and offset this by announcing full expensing, but – because of his fiscal rules – it was only for a temporary period. Business needs stability and predictability, so making it permanent was welcome.
- Another highlight was the reduction in national insurance for employees. This should help demand and employment, with the main rate for employees cut from 12% to 10%. The Treasury states this will raise average pay by £450 per year for a person on average earnings of £35,400. There were two other changes to national insurance, aimed at helping the self-employed, with class 2 reductions removed and class 4 reductions reduced. This was alongside increasing the state pension by 8.7% in line with earnings, benefits rising in line with September’s inflation rate of 6.7% and an increase in the national minimum wage from £10.42 per hour to £11.44. Overall, the measures to help demand were economically justified given the threat of recession.
- There were 67 fiscal measures announced, many small. This micro-managing has become the norm. For instance, there were 84 such measures in the March 2023 Budget and 75 in last year’s Autumn Statement. Just as predictability and stability of taxes is welcome (such as in making full expensing permanent) there is a need for tax simplicity too, and such constant tinkering does not help move us in this direction.
- The scale of the fiscal boost announced today was significant. The Chancellor announced a net fiscal boost of £93.7 billion over the next six fiscal years including this year. This breaks down into boosts in each year of: £6.7 billion (in 2023/24), £14.3 billion (2024/25), £12.44 billion (2025/26), £18.12 billion (2026/27), £21.04 billion (2027/28) and £21.1 billion (2028/29). This compares with a fiscal tightening of £131.3 billion last autumn when the aim was to stabilise the markets, with in particular, a squeeze on public spending in future years. It also compares with a fiscal boost of £91.3 billion in the March 2023 Budget.
- There has been a significant rebalancing of macro-policy this year. This was necessary, as in previous years the focus had been on cheap money. Now we have seen a tighter monetary stance (although rates have risen too far) and a more proactive fiscal stance this year. The two fiscal events this year have provided a combined boost of £185 billion. In terms of this Statement the two biggest fiscal boosts (or costs to the Exchequer) were those two headline areas of full expensing, which reaches £10.9 billion per year by 2028/29, and the combined three changes to national insurance which will total £10.0 billion in 2028/29.
- There was a welcome plethora of supply-side measures. 110 were mentioned in his speech by the Chancellor. It will take time to determine their effectiveness, but the areas identified made sense, with skills, planning and housing mentioned. Also noteworthy was the £4.3 billion tax cut in the form of freezing business rates.
- Another positive development appears to be the reforms to pension funds. These have already been trailed, and were in line with the Mansion House reforms already announced by the Chancellor. The aim is to attract more savings into more long-term investment within the UK. The UK has suffered from a lack of patient capital and this still needs to be addressed, with growth sectors and small firms often appearing to lack access to capital. The new measures included consolidation of the pension industry, including for local authorities by 2040. More investment zones and investment funds were announced.
- What then of the broad stance? The Office for Budget Responsibility (OBR) provides the economic forecasts, which in turn determine the fiscal space that is available to the Chancellor. It is important to appreciate that the margin of error on the fiscal numbers can be large, even for one year ahead forecasts. In part this is because the economic backdrop can change significantly, but also it is because the budget deficit itself is the difference between two large numbers (government expenditure and receipts) that are subject to many changes and shocks. The latter is particularly relevant now, given the impact of higher inflation on squeezing public spending in ‘real’ terms (after allowing for inflation), as well as boosting earnings and dragging people into higher tax brackets – known as so-called ‘fiscal-drag’.
- The OBR’s latest economic forecasts were more upbeat than expected. The economy has been resilient over the last year, but nonetheless it is still fragile. There is a risk of recession over the next year, highlighted by recent data that shows weak purchasing managers’ indices (which are in recessionary territory) and annual falls in monetary growth and in bank lending. Also, the full impact of monetary policy tightening has yet to feed through. This outlook strengthened the case for the fiscal boost today – and will likely add to the case for another boost in the March Budget and for lower interest rates in the second half of next year, as inflation decelerates further. As expected, the OBR revised up their economic forecast for this year, but reduced it for next. Now the OBR expects the economy to grow 0.6% this year, compared with the 0.2% contraction they expected back in March. The latest OBR forecasts are (with the forecasts they made at Budget time shown in brackets): 2023 0.6% (-0.2%); 2024 0.7% (1.8%); 2025 1.4% (2.5%); 2026 2.0% (2.1%); 2027 2.0% (1.9%) and 1.7% in 2028. An important change is that in the last two years, real incomes have fallen, whereas real incomes are now set to rise. On a positive note is that employment is expected to rise from 32.9 million this year to 34 million by 2028, with the unemployment rate remaining low.
- The fiscal numbers are improving but debt levels are still high. Because of the increase in nominal GDP (which reflects a combination of inflation and growth) the ratio of debt to GDP is trending down. Public sector net debt to GDP is expected to fall from 97.9% this year (2023/24) to 94.1% (in 2028/29). The budget deficit, too, is expected to decline, from 4.5% this year to 3% next (2024/25) and to 1.1% by (2028/29).
- A note of caution is that with a number of previous Statements and Budgets, it has only been in subsequent days, as the detail is unveiled, that a full assessment can sometimes be made. It would not be a surprise if there is a greater focus on such detail in coming days, including the squeeze on departmental budgets because of higher inflation. And also, despite today’s measures, as the OBR’s report indicates, the future tax take is still set to rise – to 37.7% of national income by 2028/29, largely because of fiscal drag.
- The Statement has had a neutral impact on the markets, but at least they have not been spooked, in part because expectations had been managed, both in terms of the likely scale of the fiscal space available as well as the headline measures that were announced. Nowadays, fiscal measures need to be seen by the market as necessary, affordable and non-inflationary, as well as being targeted. That was the case. The UK has a low growth, low productivity, low wage economy. There is still a large amount of government debt to be digested by the markets with the Red Book reporting that, “Total gilt sales in 2023-24 are now forecast to reduce by £0.5 billion to £237.3 billion.”
In conclusion: Today’s boost was welcome and tax cuts were necessary given that the economy faces cyclical and structural challenges. However, just as the economic growth numbers have not recovered fully from the 2008 global financial crisis, the fiscal numbers have not yet recovered from the pandemic. The government’s options are to try to grow the economy, borrow, curb spending, tax or reform. Or a combination of all of these.
The Chancellor stated that he has met his fiscal rules, keeping the budget deficit below 3% of GDP and reducing the ratio of debt to GDP in future years. But the fiscal and debt numbers are vulnerable if growth is weak and/or rates are high. The likelihood is that interest rates and bond yields have peaked, the issue is what happens to growth. At least this Statement has focused on measures to address growth.
The OBR sees potential output growth at 1.6%. That is probably higher than the consensus sees it, but even with the OBR’s figure it would take the economy about 45 years to double in size, in real terms. Before the 2008 crisis, that figure stood closer to 32 years. The boost to growth in this Statement is positive, but far more is needed.
Please note, the value of your investments can go down as well as up.
