- Hunt says the economy is "back on track"
- But will measures be enough to improve the gloomy inflation and growth outlook?
Jeremy Hunt announced 110 new measures during Wednesday’s Autumn Statement as part of his ‘Statement for growth’. The Chancellor told MPs that “the Conservatives will reject big government, high spending and high tax because we know that leads to less growth, not more”.
Hunt announced a 2p cut in the rate of employee National Insurance and abolished Class 2 National Insurance contributions for almost 2mn self-employed workers. He also cut the rate of Class 4 contributions by 1 percentage point. The Chancellor also announced reforms that would let workers maintain a pension “pot for life” with a pension fund of their choice. Despite speculation, widely trailed changes to income tax and inheritance tax were not introduced.
Hunt also announced a range of measures designed to incentivise work and increase productivity. In a move dubbed the biggest tax cut for businesses in modern British history, the Chancellor made “full expensing” – a tax relief allowing businesses to offset investment – permanent. The measure is expected to increase business investment by £20bn a year – almost 1 per cent of GDP. The Chancellor also revealed a 'Back to Work Plan' providing additional support and tougher sanctions for people not looking for employment.
The Chancellor uses his headroom
The announcement came in the wake of October’s promising public finance figures. Borrowing for the financial year-to-date came in at £17bn lower than the Office for Budget Responsibility (OBR), the fiscal watchdog, anticipated thanks to higher inflation boosting the tax take through fiscal drag.
This left Hunt with double the ‘headroom’ against his fiscal rule on debt as a proportion of GDP than the OBR anticipated in March.
According to the latest forecasts, debt, which had been on track to reach 100 per cent of GDP, will now fall to 94 per cent of GDP by the end of the rolling five-year forecast period.
But today’s measures do not come cheap, and the OBR expects the Chancellor to spend almost all of this ‘windfall’ on the new plans. National Insurance cuts will cost more than £10bn, while the permanent extension to ‘full expensing’ comes in at just under £9bn. Analysts at Capital Economics calculated that the average net giveaway between 2024/25 and 2028/29 will be more than £15bn, while the total over the period will be almost £94bn.
As expected, the Chancellor clawed back some of this by making civil service cuts and introducing measures to improve public sector productivity. Hunt announced significant increases to benefits and the state pension despite reports that he could claw back billions by uprating them by a smaller amount.
The OBR released more downbeat forecasts to accompany the announcement. According to their latest projections, inflation will only fall to 2.8 by the end of 2024 and the economy will grow by just 0.7 per cent in 2024.
In March, the watchdog expected the economy to grow by 1.8 per cent next year, and thought that inflation would fall to 0.9 per cent. Nevertheless, the OBR remains more optimistic than the Bank of England, whose latest forecasts see GDP stagnating next year, and inflation stuck above target until the end of 2025.
Economic challenges remain
Nevertheless, this Autumn Statement struck a more optimistic tone than last year’s austere affair. Hunt hailed progress in cutting inflation and said that the economy was “back on track”. Yet it is not clear that the measures will do enough to reinvigorate the UK economy.
After the announcement, Torsten Bell, chief executive of the Resolution Foundation think tank said that the personal tax cuts announced represent less than a quarter of the personal tax rises already in train from threshold freezes”. On a statement on X, formerly known as Twitter, he added that “taxes overall are hugely up on levels at the 2019 election” due to fiscal drag.
The longer-term public finance position also remains challenging. Though the latest borrowing figures came in below expectations, the government still borrowed £98bn in the financial year-to-October.
Alison Ring, Director of Public Sector and Taxation at the Institute of Chartered Accountants in England and Wales said that “cash going out continues to exceed cash coming in by a very large margin”.
Following the latest release, she added that “in reality, there is no headroom when the public finances continue to be on an unsustainable path without a long-term strategy to fix them”.
