Autumn Statement - tax cuts, difficult decisions deferred

27 November 2023

In his Autumn Statement last week the UK chancellor, Jeremy Hunt, managed the seemingly impossible, cutting taxes and reducing public borrowing.

A 2% cut in employees and self-employed National Insurance Contributions and the extension of ‘full expensing’ for corporate investment are significant tax reductions.

As well as cutting taxes Mr Hunt was able to announce that public borrowing this year is running well below forecast and that the government is on course to hit its target of reducing the level of public sector debt in five years’ time.

This felt like a more positive, and significant Autumn Statement, than had been expected. Beneath the surface lie uncertain forecasts and a challenging fiscal position.

Mr Hunt’s tax cuts were funded by increased tax receipts that are a product of high inflation and a freeze in personal tax allowances. In other words, inflation has delivered a windfall gain some of which the chancellor used to cut taxes. These cuts are modest compared to the scale of increase in the tax burden caused by previous tax increases and high inflation. If Mr Hunt had wanted to stick to the plan for tax receipts announced eight months ago, in the March budget, he would have needed to cut taxes by over £50bn last week rather than the actual reduction of about £11bn.

Inflation raises tax revenues, but it also increases public spending. Yet Mr Hunt made no allowance in the Autumn Statement for higher public spending. To deliver on the current plans, real day-to-day expenditure on courts, prisons, probation, transport and local government would need to fall by 14% in the next three years. That comes after years of cuts to these services. As the Resolution Foundation notes: “No-one who has used a British public service in the recent past will think these cuts can be delivered in the likes of the courts or local government”.

The Autumn Statement plan for public spending after the general election looks implausibly tight. That means either even deeper public sector austerity or, as has happened in the past, higher than forecast spending, more borrowing and a further easing of the rules governing debt.

Whoever is chancellor after the general election will face difficult decisions. Public expenditure, levels of taxation and debt are all at historically high levels. Interest payments on government debt and spending on benefits for sick and disabled people have soared. Public satisfaction with the NHS has never been lower despite large increases in spending in recent years. Defence spending is rising. After years of austerity the scope for big cuts in front line services is limited.

Balancing levels of debt, taxation and public spending will be one of the central challenges of the next parliament.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index closed the week down 0.1% at 7,488.

Economics

UK business activity unexpectedly grew, albeit marginally, in November as the S&P Global/Cips flash UK PMI composite output index rose to 50.1
Net UK immigration reached an all-time high since records began in 2022, as it registered 745,000 net arrivals driven by people coming from outside the EU
Bank of England governor Andrew Bailey warned markets not to expect inflation to quickly fall back to 2% after CPI inflation fell to 4.6% in October
UK consumer confidence rose more than expected in November as falling inflation began to provide some relief for households
UK productivity fell by 0.3% in the year to September, indicating output per worker has not changed from its pre-pandemic levels, according to the Office for National Statistics
Minutes from the Federal Open Market Committee’s November meeting showed that the US Federal Reserve is reluctant to raise interest rates any further as it waits for past hikes to feed through to the economy
30-year fixed mortgage rates in the US fell to 7.4%, reaching a two-month low as US bond yields fell on the back of softer economic data and cooling inflation
The euro area economy continued to contract albeit at a slower pace as the HCOB flash eurozone composite purchasing managers index rose to 47.1 in November
Turkey’s central bank raised interest rates by 500 basis points to 40% in a bid to reduce inflation running at over 60% in October

Business

OpenAI announced that Sam Altman will return to run the company under the supervision of a new board
Crypto exchange Binance CEO, Changpeng Zhao, pleaded guilty to violating a US banking secrecy law and agreed to pay a $50m fine
Chip manufacturer Nvidia announced that it expects higher-than-forecasted revenues in Q4 2023 as strong global demand will offset declining sales in China due to tighter AI chip rules
US carmaker Ford announced that it would scale back investments in its electric vehicle battery plant in Michigan as higher interest rates are softening demand
Siemens Energy confirmed that it seeks to cut costs by €400m after taking a €15bn governed bailout by the German government to salvage its struggling wind turbine business due to a rapid increase in costs
In the Autumn Statement, the UK chancellor announced the government would explore the sale of its share in the retail bank NatWest

Global and political developments

Far-right libertarian Javier Milei won Argentina’s presidential election promising to slash government spending, privatise state-owned enterprise and dollarize the economy
The far-right Party for Freedom recorded a shock win in the Dutch election - the party’s leader Geert Wilders is dozens of seats short of a working majority and it is unclear whether other political parties are willing to enter a coalition government with him
South Korea announced it would partially suspend its 2018 military pact with North Korea after Pyongyang successfully launched a military spy satellite, in a sign of rising tensions between the two countries
The European Parliament voted to include nuclear and carbon capture technologies as sectors eligible for priority funding in the European Commission’s Net Zero Industry Act
Germany’s defence minister Boris Pistorius pledged to increase military aid to Ukraine in a surprise visit to Kyiv

And finally… a fully grown lion was spotted roaming the streets of Ladispoli in Italy after escaping from a circus – mane attraction