If last autumn was an exercise in showing how quickly economic narratives can change – as demonstrated by the sudden shift from September’s growth-focused ‘mini’-Budget to November’s purse-tightening update from new management – it was at least necessitated by the upheaval caused by Liz Truss and Kwasi Kwarteng’s policies. The run-up to this year’s Autumn Statement was mercifully free from such drama, and yet the change of tack in recent weeks has been no less sudden. It was only last month that Chancellor Jeremy Hunt ruled out tax cuts; this month he has slashed two percentage points off the main National Insurance rate.
The rationale stems from two distinct sources: a better-than-expected fiscal position and the looming arrival of a general election next year. Neither, however, is a particularly persuasive motivator. The improved fiscal position has been driven by inflation: tax cuts were financed, according to the Office for Budget Responsibility (OBR), largely by “a £19.1bn [future] erosion in the real value of departmental spending” as the body updated its inflation forecasts. And those tax cuts still pale in comparison to the money raised last year, again effectively as a result of inflation: the national insurance cut amounts to less than a quarter of the increased revenue resulting from the continued freeze to income tax thresholds.
The value of that freeze to the government should not be underestimated: add them to other threshold changes in 2022, mix in OBR’s more realistic inflation forecasts, and receipts are now predicted to rise by £12bn in this tax year, £27bn in the next, and continue growing until they reach £44bn by 2028-29.
Then there is the election. Whether it be in six or 12 months’ time, its imminent arrival has allowed the Treasury to maintain a variety of fictions, from the idea that the government will tolerate that further £19bn cut in departmental spending to the notion that £6.2bn (half the current fiscal ‘headroom’) will raised by implementing the fuel duty freeze.
These fiscal holes will have to be filled by the new government. And the election brings with it other uncertainties. As with last year’s Lifetime Allowance abolition, the medium-term future of many of the policies announced this week is up for debate.
Some of those are wise choices: making “full expensing” permanent is a sensible move that will encourage further capital expenditure by UK companies. The latest commitment to planning reform is promising, though we have seen before how these pledges rarely survive contact with reality. And the awareness that delays in connecting to the national grid are holding back growth is distinctly welcome, and funding to reduce these bottlenecks should remain high up the political agenda for some time to come.
There are question marks over other policies. The plan for small pension pots will put the wind up the insurers and others who currently dominate workplace pension provision. Allowing employees to re-route their pension savings to an external source is driven by a reassuring goal – minimising the likelihood that a saver ends their working life with innumerable different pensions, many of which they may only be dimly aware of. Still, it will require a great deal of administrative reform before it can be implemented. Based on the delays seen over the years to the pensions dashboard, another venture motivated by the above aim, proof will be in the pudding.
The Chancellor said there were 110 growth-boosting initiatives in this week’s announcements, but from private investors’ perspective, his statement and the supporting documents were more notable for what they did not say. Various inheritance tax (IHT) cuts were raised up the flagpole in the run-up to the big day. In the event, IHT did not warrant a mention of any kind. The trailed Isa reforms proved to be a damp squib: some loosening of the rules was announced – partial transfers, multiple in-year subscriptions – but no merging of cash and stocks & shares Isas, extra allowances or simplification of any kind. And while Hunt had promised in March to return this autumn with plans designed to improve London’s status as a listings venue, policies of this ilk were confined to already-announced prospectus reforms and proposals to give pension funds more flexibility on how they invest.
Some additional changes may have been stashed away for the spring Budget, given its even closer proximity to the date on which the country must head to the polls. Others, like IHT, may even be reserved for the Conservative party manifesto. But the big, intractable question of how to provoke growth remains the overriding priority, and forecasts provide little in the way of good news as of yet. That increases the chances that many of the measures announced this week end up as temporary or even illusory in nature.
