On 29 November 2022, the House of Lords is due to debate the autumn statement 2022.

1. Economic background

The autumn statement 2022 was the first major fiscal event delivered by the new government led by Rishi Sunak. It was also the first fiscal event to be accompanied by a forecast from the Office for Budget Responsibility (OBR) since March 2022 and took place in the aftermath of significant changes in tax policy over the previous two months. The previous government, led by Liz Truss, announced a series of tax cuts—worth around £45bn per year by 2026/27—at the ‘mini-budget’ on 23 September 2022. However, most of the measures were reversed in the following weeks:

As well as reversing most of the mini-budget tax measures, Mr Hunt also permanently cancelled a planned 1p reduction in the basic rate of income tax in his 17 October 2022 statement. This reduction had initially been announced by Boris Johnson’s government to take place in April 2024, and was brought forward to take place in April 2023 by the Truss government at the mini-budget.

The only measures announced at the mini-budget which have not been reversed are:

The government suggests that the UK’s economic and fiscal outlook has “deteriorated materially” since the last OBR forecast, with the autumn statement taking place at a time of “significant economic challenge for the UK and global economy”. The government contends that the war in Ukraine has contributed to a surge in energy prices and inflation more broadly, which has led to higher interest rates. It argues that the consequent rise in debt-servicing costs has contributed to a “significant gap” between government revenues and government spending which the statement is intended to address.

The causes of the deterioration of the fiscal outlook have been debated, particularly with respect to the role of the Truss government’s mini-budget in leading interest rates and debt-servicing costs to levels higher than they might otherwise have been. Furthermore, the idea that there is a fiscal gap—often characterised as a ‘fiscal black hole’—which necessitates tax rises and spending cuts has been disputed by some economists in advance of the statement, who note that the exact size of the ‘fiscal hole’ depends on the way in which the government sets up its fiscal rules and defines sustainable public finances.

2. Main measures in the autumn statement

According to the government, the new policy measures announced in the autumn statement are intended to “consolidate” the public finances, with increased taxation and reduced spending designed to limit the government’s future borrowing requirements. However, tax and spending measures announced in the statement have not significantly altered the amount the government is planning to borrow in the near term. The material impact of the consolidation begins in 2024/25, where the net combination of tax rises and spending reductions amounts to £10bn. It then gradually increases, reaching £55bn by the end of the forecast period in 2027/28. The measures that would provide the key elements of these increases are examined below.

2.1 Taxation

Tax increases make up around £25bn of the £55bn consolidation by 2027/28. Key measures announced by the chancellor included:

  • The additional rate income tax threshold will decrease from £150,000 to £125,140 from 6 April 2023.
  • All other personal tax thresholds within income tax, national insurance contributions and inheritance tax will be frozen for two more years than planned, until April 2028.
  • The dividend allowance and capital gains tax annual exempt amount will be reduced from April 2023.
  • A vehicle excise duty on electric cars, vans and motorcycles will be introduced from April 2025.
  • The Energy Profits Levy will be extended to the end of March 2028 and its rate will be increased by 10 percentage points to 35% from 1 January 2023.
  • A new, temporary 45% electricity generator levy will be introduced from 1 January 2023.
  • The Organisation for Economic Co-operation and Development (OECD) ‘Pillar 2’ rules for a global minimum corporate tax rate will be implemented, for accounting periods beginning on or after 31 December 2023.
  • The bank corporation tax surcharge will be reduced from 8% to 3%, following the decision to proceed with the corporation tax increase to 25% from April 2023.

Business rates relief—amounting to £13.6bn over the next five years—was the only major tax reduction announced in the statement.

2.2 Spending

Reduced public spending is intended to deliver the remaining £30bn of the £55bn consolidation by 2027/28. The chancellor announced the following measures as part of the autumn statement, increasing spending on areas such as health and education in the short term, but reducing planned spending across the board from 2025/26:

  • Departmental resource spending will grow, as previously planned, at 3.7% in real terms up to 2024/25; however, this will be reduced to 1% growth a year in real terms from 2025/26 onwards.
  • Departmental capital spending will remain as previously planned up to 2024/25, but will be frozen in cash terms from then on.
  • NHS England funding will be increased by £3.3bn in both 2023/24 and 2024/25.
  • The core schools budget in England will be increased by £2.3bn in both 2023/24 and 2024/25.
  • The Energy Price Guarantee will limit annual bills for the typical household to £3,000 for 2023/24, up from £2,500 now.
  • Additional cost of living payments will be made available in 2023/24 for households on means-tested benefits (£900), individuals on disability benefits (£150) and pensioners (£300).
  • Benefits will be uprated in line with inflation from April 2023.
  • The state pension will be uprated in line with inflation from April 2023.
  • Overseas developmental assistance spending will remain at 0.5% of gross national income.

2.3 Other measures

A number of further policy decisions were also announced by the chancellor, including:

  • The national living wage will increase by 9.7% from 1 April 2023 to £10.42 per hour.
  • Rent increases for social housing in England will be capped at 7% in 2023/24.
  • The investment zones programme—initiated during the Truss administration—will be “refocussed”, with a limited number of planned zones taken forward as “knowledge-intensive growth clusters”.
  • A bill will be taken forward to provide the Competition and Markets Authority with new powers to promote competition and tackle anti-competitive practice in digital markets.
  • New devolution deals will be agreed with Suffolk County Council, Cornwall Council, and Norfolk County Council and expanded mayoral deals agreed with local authorities in the north-east of England.

3. Fiscal forecast

In its economic and fiscal outlook, the OBR notes that the fiscal outlook for the UK has deteriorated significantly since their last forecast in March 2022. Before accounting for measures announced in the autumn statement, the OBR was expecting government borrowing to be £75bn higher in 2026/27 than they were forecasting in March. The OBR states that almost two-thirds of this could be attributed to higher debt interest costs resulting from higher interest rates, with the “energy-shock-driven” loss of tax receipts and “inflation-driven” rise in welfare spending the other major factors.

Measures announced in the autumn statement are intended to partially offset this expected increase in government borrowing. Nevertheless, public sector net borrowing and public sector net debt are still expected to be higher by the end of the five-year forecast period than was the case when the OBR produced its last forecast in March.

3.1 Public sector net borrowing

The OBR forecasts that public sector net borrowing will rise from £133bn (5.7% of GDP) in 2021/22 to £177bn (7.1% of GDP) in 2022/23. This is mainly due to higher debt interest spending and the cost of energy and other cost-of-living support to households and businesses. Relative to its March forecast, the OBR expects borrowing to be an average of £61bn (2.4% of GDP) a year higher between 2022–23 and 2026–27.

3.2 Public sector net debt

The OBR expects that public sector debt will rise from 84.2% of GDP last year to 97.6% in 2025/26. It then expects the debt-to-GDP ratio to fall slightly in 2026/27 and 2027/28, as GDP growth picks up and government borrowing falls.

3.3 Fiscal rules

Fiscal rules are intended to restrict spending and taxation policy by setting targets for key indicators such as the budget deficit and public sector debt. The government proposed two new fiscal rules at the autumn statement to guide fiscal policy decisions:

  • public sector net debt debt to fall as a share of GDP in the last year of the forecast period (2027/28)
  • public sector net borrowing to not exceed 3% of GDP in that same year

The OBR notes that, as a result of policy measures taken in the statement, the government is on track to meet their proposed new fiscal rules. However, it also notes that the government is not on track to meet two of the existing fiscal rules which are currently set out in legislation: namely, for underlying debt as a share of GDP to be falling in the third year of the forecast, and for there to be a current budget surplus in that same year.

3.4 Tax and spend as a share of the economy

Tax revenues as a share of GDP are forecast to peak at 37.5% of GDP in 2024/25, before falling back to 37.1% by 2027/28. This is an average of 1.1 percentage points higher than the OBR forecast in March. The OBR note that this increases in the tax-to-GDP ratio is reflects “stronger outturn receipts, stronger growth in wages and nominal consumer spending” in the near term, and the impact of tax-raising measures over the medium term.

Spending as a share of GDP is expected to be 47.3% and 47.2% in 2022/23 and 2023/24 respectively. The OBR notes that this reflects the cost of energy support measures, increased spending on debt interest and a weaker outlook for GDP growth. Spending as a share of GDP is then expected to fall sharply in 2024/25, gradually decreasing to 43.4% in 2027/28—a rate which is 2.9 percentage points higher than the OBR forecast in March.

4. The economic forecast

The OBR notes that the rising prices of energy, food and other goods has pushed up interest rates to levels not seen since the 2008 financial crisis. It suggests that this combination of factors had “taken much of the wind out of the global economic recovery from the pandemic”. With respect to the UK, the OBR expects the economy to now be in a recession which will last just over a year.

4.1 Inflation

The OBR expects inflation—as measured by the consumer price index—to peak at a 40-year high of 11.1% in the fourth quarter of 2022. It noted that the peak could have been as high as 13.6% were it not for the Energy Price Guarantee. It predicted that inflation will decrease but remain elevated in 2023 at 7.4%, as consumer demand is supported by fiscal support for households. The OBR then forecasts that inflation will fall sharply, to 0.6% in 2024 and –0.8% in 2025, as energy and food prices fall back and tighter fiscal and monetary policy puts downward pressure on demand.

4.2 Economic growth

The OBR has forecast that the economy will have grown by 4.2% in 2022, largely because of base effects relating to strong growth in the second half of 2021. However, it has also forecast that the UK economy will be in recession from the third quarter of 2022. The OBR expects that recession to last for five quarters, resulting in output falling by 1.4% in 2023.

Growth is expected to recover to 1.3% in 2024 and then remain above 2% for the rest of the forecast period. Nevertheless, by the first quarter of 2027, the OBR expects that cumulative growth in output since the fourth quarter of 2019 will be 3.4 percentage points lower than what it forecast in March. This reduction is partly due to reduced business investment, but primarily due to decreased real incomes reducing household consumption.

4.3 Unemployment and earnings

The OBR notes that the latest data indicate that the labour market remains “tight”, with unemployment remaining at a historically low rate—3.6% in the period from June to September 2022. Nevertheless, the OBR expected unemployment to rise with the forthcoming recession, reaching a peak of 4.9% in the third quarter of 2024. Unemployment is then expected to fall back to its “structural rate” of 4.1% by late 2027.

Nominal earnings are expected to grow by 5.9% in 2022 and 4.2% in 2023, rates that are, respectively, 0.6 and 1.3 percentage points higher than the OBR forecast in March. However, as a result of high inflation, this translates to real-term falls in earnings of 1.8% in 2022 and 2.2% in 2023.

4.4 Living standards

The OBR forecasts a dramatic decline in real household disposable income (RHDI)—a key measure of living standards—over the next two years. As illustrated in figure 1, RHDI per person is forecast to fall by a cumulative 7.1% in 2022/23 and 2023/24, to its lowest since 2013/14. By 2027-28, RHDI per person recovers its 2021/22 level, but remains over 1% below pre-pandemic levels.

Real household disposable income per person
Figure 1. Real household disposable income per person

Source: Office for Budget Responsibility, ‘Economic and fiscal outlook: November 2022’, 17 November 2022, p 18.

The OBR notes that the decline in RHDI is primarily a result of high inflation eroding real incomes, and it says that the Energy Price Guarantee would prevent it falling further. It notes that the net impact of tax and benefit policy decisions are forecast to contribute to the fall in RHDI in 2022/23—primarily due to the freezing of tax thresholds reducing disposable income—but they will help offset the fall in 2023/24, with an additional round of cost-of-living payments boosting disposable income.

5.    Reaction

Reacting to the statement, many commentators noted how the bulk of the fiscal consolidation announced has been scheduled to take place after the next general election. There was also significant focus on the OBR’s stark projections for a falling in living standards, in spite of the government’s cost-of-living support measures.

5.1 Political

In her response to the statement the shadow chancellor, Rachel Reeves, said the UK was “uniquely exposed” to global economic turbulence as a result of decisions made by consecutive Conservative governments. She said that those actions had “forced our economy into a doom loop, where low growth leads to higher taxes, lower investment and squeezed wages”, noting that the UK was “the only G7 economy that is still poorer than before the pandemic”. She suggested that, instead of making “ordinary working people pay the price”, Labour would have taken action on ‘non-doms’ and tax breaks for private equity managers, as well as doing more to tax the profits of energy firms.

Alison Thewliss, the SNP treasury spokesperson, suggested that the government was attempting to “cut their way out of a recession” and that they are not “keeping step” with a cost-of-living crisis that “the Tories created”. She suggested measures such as raising dividend tax rates and a windfall tax on the share buybacks of FTSE-listed companies as alternative revenue-raising measures.

Sarah Olney, the Liberal Democrat treasury spokesperson, said the Autumn Statement will “cause untold pain for everyone” and that the government is “forcing ordinary families to pay for their incompetence”.

5.2 Thinktanks

Director of the Institute for Fiscal Studies, Paul Johnson, said that the move towards fiscal consolidation was a “belated recognition of some harsh fiscal realities”. He added that on balance the decision to backload to fiscal consolidation was the right choice given the uncertainty regarding the economic outlook and the “potential economic and social costs of an unnecessarily large up-front fiscal tightening”, but he cast doubt on the credibility of the plans to sharply reduce spending growth from 2025 onwards. Johnson has suggested that the Chancellor is “erring on the side of caution in terms of protecting spending and the economy in the short run, rather than erring on the side of prioritising shoring up the public finances.”

The chief executive of the Resolution Foundation Torsten Bell suggested that Jeremy Hunt had “combined the ‘tough choices’ rhetoric of George Osborne with the policies of Gordon Brown” through near-term support on energy and stealth tax rises for middle and top earners. On a positive note, he noted that the OBR was predicting a historically shallow recession with a subsequent recovery in growth, unlike the Bank of England. However, he also claimed that “living standards are stuck in a depression”, with real wages not expected to return to their 2008 level until 2027.

The National Institute of Economic and Social Research response states the Chancellor “should have provided more support to UK households” given the significant fall in real incomes, and that the government’s “arbitrary” fiscal targets could have been adjusted to accommodate this. However, it also noted that the increased cost of servicing debt leaves the UK’s public finances “vulnerable to economic uncertainty”.

The chief economist of the New Economics Foundation (NEF), Alfie Sterling, suggested that the narrative that there was a “public finance crisis” was misplaced, and that the Autumn Statement had highlighted the squeeze on living standards as the real crisis. The NEF published research on the day of the statement suggesting that: “Over a third of households (10.6 million) will be unable to afford the cost of essentials like household bills or a trip to the dentist by April 2024”.

The Centre for Policy Studies describes the Autumn Statement as “a sensible and measured response to the fiscal challenges facing the country”, while noting that the “longer-term picture remains bleak” and that a “comprehensive growth plan” was required in the coming months.

The director general of the Institute of Economic Affairs, Mark Littlewood—having previously endorsed the mini-budget—suggested that the Autumn Statement was a “recipe for managed decline” which failed to deal with the structural weaknesses of the UK economy.

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Cover image from HM Treasury at Flickr