Autumn Statement 2023: Everything you need to know

This Wednesday, Chancellor Jeremy Hunt will announce the Autumn Statement, alongside new government finance forecasts from the Office for Budget Responsibility (OBR), the government's spending watchdog. Economists now expect these to show more ‘fiscal headroom’ – raising the prospect of more generous giveaways this week. 

The nation’s tax burden is on track to reach a post-war high, but the Chancellor faces a difficult economic backdrop. Having labelled tax cuts “virtually impossible” earlier in the Autumn, Hunt told Times Radio over the weekend that he wanted to "show people that there’s a path to lower taxes". However, he also added: " I also want to be honest with people, this is not going to happen overnight."

Here, Investors’ Chronicle explains the challenging public finance position and looks at what to expect.

Has the Chancellor met his fiscal rules?

In last year's Autumn Statement, Hunt set out targets for debt and borrowing designed to restore the government’s economic credibility. According to these rules, debt should be falling as a proportion of GDP by the fifth year of the OBR forecast. In this case that is the 2027/28 tax year. If the Government wants to spend more than it raises from taxes and other sources of income, government borrowing must not exceed 3 per cent of GDP by the fifth year of the forecast period. 

The latest forecasts suggest that Hunt is on track to meet both targets – though they are less stringent than they sound. The Institute for Fiscal Studies (IFS) think tank says that the debt target is “poorly designed” since the forecast ‘rolls forward’ by a year each autumn. The second target is also relatively easy to meet: since 1946, annual borrowing has only averaged 2.8 per cent of GDP, meaning the rule allows for above-average borrowing.

What is the public finance position? 

The latest OBR forecasts won’t be published until Wednesday, but economists expect the government to have more headroom against their rules than in the Spring Budget.

Analysts at Goldman Sachs forecast that headroom will rise to £25bn as higher tax receipts outweigh increased interest rate expenses. On the spending side, falling RPI inflation has reduced payments on index-linked gilts, meaning the government has recently spent less than expected on debt interest, as the chart shows. 

Resilient growth and a strong labour market also meant a buoyant tax take in September – £1.9bn higher than the OBR expected. The combined impact of last year’s tax threshold freezes and higher inflation means that taxpayers will be paying more for years to come, too. According to estimates from the Resolution Foundation think tank, tax receipts are up permanently by around £40bn as a result of this fiscal drag.

Is there much scope for giveaways? 

Goldman Sachs economists expect the government to use some of this headroom to introduce tax cuts totalling around £10bn. Hunt told reporters over the weekend that he wanted to “bring down our tax burden” to motivate people to work and create a “dynamic, fizzing economy”. 

But high inflation means that public finances are under huge pressure from spending on health and state pensions while rising gilt yields have pushed up the cost of newly issued government debt. Even worse, the impact of this year’s huge interest rate hikes is yet to feed through (see chart), meaning slower growth – and lower tax revenues – probably lie ahead.

Generous tax and spending policies also risk reigniting inflation by fuelling a spending boom. At the weekend, Hunt said that though he wanted to cut taxes, he would not “jeopardise” the fight against inflation, which, though falling, remains significantly above the Bank of England 2 per cent target

Will we see pre-election tax cuts instead?

As the chart shows, confidence in the government’s ability to ‘handle the economy’ has been dented. This means that the economy is likely to be a key battleground in the run-up to the next general election. 

Analysts at Goldman Sachs expect the government to “conserve the majority of its headroom for the Spring Budget”, noting that a more substantial package of tax cuts and spending would risk raising inflation today. The IFS also warns that an ill-timed package of unfunded tax cuts could ultimately fuel inflation, meaning higher interest rates and a protracted recession as a result. 

Forecasts from the National Institute of Economic and Social Research (NIESR) suggest that though there may be some “limited fiscal space” in 2024, this should be used to increase investment in infrastructure and housing – rather than to cut taxes. According to the think tank, a new policy mix and higher investment are necessary for the UK economy to avoid “another period of protracted stagnation where we fall further behind other advanced economies”.

What changes will the government make?

Income tax and national insurance

The Chancellor could also use his headroom for income tax and national insurance cuts. Hunt was keen to stress the ability of tax cuts to “motivate people to work” over the weekend, and the Sunday Times reports that he is considering cutting the basic rate of income tax by 2p, at a cost of £13bn. Hunt is also reportedly considering a cut in National Insurance, particularly for self-employed workers. This should have the advantage of being cheaper and less inflationary than income tax cuts.

Pensions reform

Hunt is working on a reform of workplace pensions, according to reports in the Financial Times. Under the new system, workers will have a “pot for life” with a pension fund of their choice, which will stay the same throughout their careers.

Pension contributions are currently paid into the workplace pension scheme chosen by the employer, so employees who change jobs often end up with multiple small pots in different schemes, especially in the early part of their careers. The new system would be more similar to the Australian “superannuation” system: however, this system has led to the creation of a handful of mega funds, which savers choose from, rather than the multitude of options currently available to UK savers.

Hunt is looking for ways to incentivise pension funds to invest more in the UK economy, which was also the focus of his Mansion House reforms earlier this year. But it remains unclear how creating pension “pots for life” would deliver that give the range of providers mean all could be too small to make a meaningful impact.

Tom Selby, head of retirement policy at AJ Bell, also noted that this would be a potentially complicated change to make, especially so close to the next election. “The biggest sticking point to these proposals is the burden on employers,” he said, which would face additional administrative burden if they had to connect to any pension scheme an employee chooses.

“Given the proximity of the general election and Labour’s substantial lead in the polls, there is every chance Keir Starmer’s party will have the final say on whether these reforms ever see the light of day,” Selby added.

Isas

Hunt is pondering changes to Individual Savings Accounts (Isa), according to reports in The Telegraph. One of the options under consideration is allowing people to pay into more than one Isa of the same type in the same tax year, making it easier for them to switch providers, for example. 

Dean Butler, managing director for retail direct at Standard Life, noted that this could come handy for savers who subscribed to a fixed rate cash Isa earlier this year, only to see much better rates appear on the market later on. “The ability to start saving into another cash product mid-way through the tax year would be a major win for people in this situation and could also incentivise providers to improve rates,” he said.

This would be a relatively minor change compared to the Isa overhaul that seemed to be on the cards earlier this autumn. The government had considered offering an extra Isa allowance for people to invest in UK companies, in an effort to boost domestic investment. That was subsequently downplayed but could yet emerge as part of a wide-ranging Isa consultation tomorrow.

Meanwhile, industry figures have long called for changes to Lifetime Isas (Lisas), but reports suggest that Hunt has decided against them. Lisas currently punish savers for withdrawing their money for reasons other than buying their first home or after the age of 60 – the penalty is higher than the original government bonus paid on the account. Many have also called for the £450,000 Lisa house price limit to increase, given that its real value has drastically diminished over the years. 

Hunt could clarify whether fractional shares can be held in Isas or not. Giving fractional shares the green light would be a welcome move for young investors and for the platforms offering them, which are currently locked in a dispute with HMRC.

Inheritance tax

Some 50 Tory MPs have called for inheritance tax (IHT) to be abolished, and the tax is considered one of the most hated in the country. As mentioned, Hunt does not have much room for actual tax cuts, but he could reduce the IHT rate or raise the £325,000 tax-free threshold.

A higher £500,000 threshold for everyone could for example replace the additional £175,000 residence nil rate band, which currently only applies to those who leave their home to their children and grandchildren. Even this switch wouldn’t come free: Quilter calculates it would cost about £6bn between 2024/25 and 2027/28.

But Shaun Moore, tax and financial planning expert at Quilter, argued that it could be attractive for the government because it simplifies the tax and looks good without being overly expensive. “They essentially can look generous while not actually giving that much away,” he said.

Inheritance tax cuts also have the advantage of being less inflationary – the IFS points out that because the beneficiaries are relatively well-off, they are more likely to save the proceeds. But this also makes the policy a hard sell during a cost of living squeeze. The IFS points out that over four fifths of the gains from any reduction in inheritance tax would go to those with pots of over £1m at death. As a result, there is some speculation that changes to inheritance tax will be delayed until the Spring Budget.

Business taxes 

According to reports in The Times, the Chancellor is expected to freeze business rates for small companies, while the threshold at which businesses pay VAT could be increased from £85k to £90k as part of an effort to ease the tax burden facing firms. The Chancellor is also likely to extend “full expensing” – a tax relief allowing businesses to offset investments against corporate tax – beyond its current 2026 expiry date.

Pensions triple lock 

The state pension is currently due to increase by 8.5 per cent in April 2024, in line with the annual wage growth increase for the three months to July 2023. The ‘triple lock’ mandates that the state pension rises every year in line with whichever is the highest between average annual earnings growth from May to July, inflation in the year to September or 2.5 per cent.

But the government could decide to tweak the numbers to deliver a lower increase. It could argue that NHS bonuses inflated July’s earnings and use the lower 'smoothed' 7.8 per cent figure, which excludes bonuses. Or it could ditch the earnings element of the triple-lock and increase the state pension by 6.7 per cent, in line with the September inflation figure.

Regarding pensions, the Autumn Statement could also contain clarifications on how the abolition of the pensions lifetime allowance will be implemented from April 2024.

Support to the property market 

It’s a difficult time for homeowners, buyers and sellers, with interest rates making mortgages unaffordable for many and house prices slumping as a result. Hunt could intervene by tweaking stamp duty or offering support to first-time buyers.

Options include a stamp duty exemption for those looking to downsize to a smaller property or a stamp duty rebate for new homeowners who improve the energy efficiency of their properties. Sian Steele, head of tax at Evelyn Partners, noted that stamp duty receipts have been increasing substantially over the years, making the tax quite unpopular. Meanwhile, stamp duty reliefs and holidays “are relatively easily implemented, although they do cause angst for those caught on the wrong side of deadlines", she said.  

The mortgage guarantee scheme, which supports first-time buyers with small deposits by increasing the availability of 95 per cent loan-to-value mortgage products, is due to expire at the end of the year, but Hunt could extend it for another year.

Work, benefits and wages

It looks like more labour market reforms are on the agenda. At the Conservative Party conference, Hunt announced that the National Living Wage would rise to more than £11 an hour by April 2024. Hunt also announced plans for tougher benefit restrictions on those who “won’t even look for work”. 

The Guardian reports that Hunt is considering raising extra revenue by putting benefits up in line with October’s inflation figures (4.6 per cent), instead of September’s (6.7 per cent). Economists estimate that this would save the Chancellor around £2bn, but would hit around 9mn households.

Fuel duty

There is speculation that the Chancellor will use the Autumn Statement to end the freeze on fuel duty, triggering the first increase since 2011. Fuel duties are a significant source of revenue for the government, and the IFS estimates that freezing duty for the next five years could cost £6bn. VC