UK chancellor Jeremy Hunt laid out his plans for the British economy today. The statement was made against a backdrop of a more than 40-year inflation high and recession warnings from the Bank of England.
The main aim of the statement is to restore government credibility following the disastrous September mini-budget from the previous chancellor Kwasi Kwarteng. To do this, Hunt said before the announcement that he would be making “eye-watering” decisions about tax rises and spending cuts.
We asked a panel of experts to analyse whether the government has achieved these twin aims of stabilising the economic picture and addressing a dire cost of living crisis.
Stealth taxes and rising costs
Jonquil Lowe, senior lecturer in economics and personal finance, The Open University
The government’s expected spending cuts and tax rises, set to reach £30 billion and £24 billion respectively, were difficult to spot. Instead, the chancellor appeared to be announcing more spending on health, social care and education, while promising continued help with energy costs and the cost-of-living crisis.
But in the shadows loomed stealth taxes and public service “efficiency savings” as inflation rates continues to bite, with the OBR predicting that living standards will fall by 7% over the next two years
Starting with income tax, the thresholds of personal allowance (£12,570) and higher-rate tax (£50,270) will now remain frozen until April 2028. So too will the threshold for national insurance (also £12,570).
This means that as incomes rise (even if not by enough to counter the impact of inflation) more people who were previously non-taxpayers will start to pay tax, and more basic-rate taxpayers will slip into the higher-rate bracket. More people will also pay the 45% rate as that threshold drops from £150,000 to £125,140.
From April 2023, households will also see a bigger rise in council tax bills, as local authorities are given the freedom to increase them by up to 5%, which includes 2% to meet social care costs. Plans designed to protect individuals from bearing catastrophically higher care costs have been delayed for two years.
Meanwhile, the energy price guarantee which shields households from the full impact of soaring global energy prices is set to be extended by 12 more months from April 2023. Although energy costs will still rise, the “typical” household will see their energy bills capped at £3,000 a year (up from the current £2,500).
Surprisingly the guarantee will continue to apply to all households, not just the most vulnerable. But the government is consulting on restricting this state support in the case of those who use very large volumes of energy. It has also said it will look into improving social tariffs for vulnerable households.
There will be a repeat roll out of cost-of-living payments in 2023-24, with £900 for households on means-tested benefits, £300 for pensioner households and an extra £150 for individuals on disability benefits.
Benefits and state pensions will go up by 10.1%, in line with September’s inflation rate. But the government is going ahead with plans to put pressure on working-age claimants to increase their hours or earnings. It is not clear whether this will include sanctions for those who don’t succeed.
Filling ‘black hole’ will hit growth
Phil Tomlinson, professor of industrial strategy, deputy director centre for governance, regulation and industrial strategy, University of Bath
The new chancellor has adopted the persona of Mr Micawber of Charles Dickens’ David Copperfield – whose happiness depended on living within his means. The chancellor wants to fill a £55 billion “black hole” in the public finances. This is the gap between the Office for Budget Responsibility (OBR) forecasts of national debt and the government’s own fiscal target to reduce public debt as a proportion of national income over the next five years. To do this, the chancellor has announced a combination of public spending cuts and tax rises. This is a political choice rather than one based on economics. The black hole arises from the government’s own accountancy rules and highly uncertain forecasts.
Unlike ordinary households, the UK government has an infinite amount of time to repay its debts. And, as a currency issuer (exchange rate and inflation risks aside), it can always repay debts denominated in sterling. The UK’s debt to GDP ratio is also the second lowest among the G7 group of nations. So, the government actually has scope to invest in the economy.
The announced fiscal tightening will reduce demand in the economy and hit critical investment in public services and infrastructure. This is at a time when the UK is entering what is expected to be the longest recession since records began. Some might suggest the chancellor has joined the “anti-growth coalition” because the measures announced today will hurt growth. These cuts will also feel like a betrayal to Tory voters who bought into the promise of levelling up.
Anaemic growth has plagued the UK for more than a decade. Micawber eventually triumphed over adversity by borrowing to purchase a ticket to start a new (and successful) life in Australia. Public borrowing to invest in the UK’s dilapidated public services, research and development, green technologies and infrastructure would boost the supply side of the economy, increasing productivity and stimulating growth. Instead, the autumn statement is a return to austerity and hard times.
Economy worse now than when austerity first introduced
Shampa Roy-Mukerjee, associate professor in economics, University of East London
Spending cuts announced in the autumn statement have been widely dubbed “Austerity 2.0” since they follow 12 years of austerity measures implemented by previous Conservative chancellor George Osborne. But there are some major differences between the two and the impact they will have on UK households and businesses.
First, the 2010 austerity measures were introduced after public services had enjoyed record levels of investment by the previous Labour government, leaving more scope for cuts. With no real term investment in public services since 2010, many are already cut to the bone.
Second, when austerity cuts were introduced in 2010 the economy was growing, albeit slowly. But the Bank of England has announced a UK recession for the next eight quarters – one of longest in recent history. More deep cuts to public services will negatively impact growth.
Third, in 2010 inflation was under control and interest rates were much lower than today, hovering around 1%. This allowed the Bank of England to carry out quantitative easing (QE – increasing the money supply) to grow the economy after the 2007-8 global financial crisis. This is certainly not the case now as the bank has ruled out such measures and has steadily increased interest rates to 3%, so far, to control inflation.
High interest rates increase the cost of borrowing for households, businesses and the government, negatively affecting future investment in the economy. Labour markets are also tighter than ever and the shortage in skilled labour in public services and in private businesses is preventing economic growth.
The government’s ability to balance economic growth and commit to fiscal discipline amid one of the worst economic downturns in recent history will also depend on global events. Russia’s war in Ukraine, China’s COVID lockdowns, as well as the ability of the UK to forge trade and foreign investment deals post-Brexit will all affect the success of Hunt’s plans.
£2.3 billion support for education
Hilary Ingham, senior lecturer in economics, Lancaster University
Somewhat surprisingly, in the light of the £50 billion hole in government finances, the chancellor today announced a strong support package for education, calling education a public service that determines all our futures. Referring to the UK rising nine places in global league tables for maths and reading, Hunt stressed the need for the country’s school leavers to have the skills needed for the modern economy when they enter the workforce.
With the better off spending more on private treatment, a tipping point leading towards complete breakdown feels imminent. Despite funding promises, major social care challenges remain unresolved, providing a good indication of where we are heading with a broken NHS – potentially ending up with a multi-tiered US-style system which is more expensive and less equitable. This is why a fresh vision is required for taxation that goes beyond simply trying to balance the books.
Karen Bloor, professor of health economics and policy, University of York
He also (unsurprisingly but importantly) accepted the findings of the health select committee (where he was formerly the chair) on the health and care workforce; staff retention and productivity are key to getting performance back on track. Although he announced investment in social care, he avoided any real reform and again delayed implementing the cap on care costs.
Taxes will reduce investment in energy
Adi Imsirovic, senior research fellow, Oxford Institute for Energy Studies, University of Surrey
As expected, the chancellor increased the windfall tax on profits of oil and gas firms from 25% to 35% and extended it until March 2028. From January, he also introduced a temporary 45% tax on electricity generators.
Both taxes tend to reduce investment in energy, just as we need more of it. The biggest multinational energy companies also make most of their money overseas, making the policy limited in scope. But right now the UK needs the money, and these two taxes will raise around £14 billion next year alone.
Yet if the profits for energy companies caused by the war in Ukraine are the driver for these taxes, an opportunity was surely missed to tax other sectors of the economy which have also made huge profits from the war – such as arms manufacturers.
Elsewhere the chancellor set a target of cutting energy demand by 15% by investing £6 billion in insulation and efficiency, and creating an energy efficiency taskforce. These are good policies – increasing efficiency is the easiest and cheapest way to reduce energy bills and improve energy security – but probably amount to a case of too little too late. The continued ban on onshore wind and slow approvals of all energy projects remain major obstacles, but were not addressed at all.
The energy price cap was extended for one year beyond April, but the typical bill was capped at £3,000 a year, £500 higher. Capping prices is a bad policy, keeping demand high while funding despots like Putin. A better policy would be targeted measures to help households on means-tested benefits.
The chancellor will give them an extra £900 next year. Pensioner households will get £300, and those on disability benefits £150. But if the chancellor got rid of the price cap, which disproportionately subsidised the rich, he could have been far more generous towards those in need – and saved some cash for the government coffers at the same time.
An eye on the election
Despina Alexiadou, senior lecturer at the school of government and public policy, University of Strathclyde
The autumn statement was designed to win back the trust of international markets in a challenging economic climate - but also with a clear eye on the next general election.
Taxing the richer earners, for example, was the most progressive element, with its reduction in the highest tax rate threshold from £150,000 to just over £125,000. For while this might not be something we’d expect from a Conservative government, the majority of voters clearly favour higher taxes on high income earners.
According to a recent survey, 64% of British people support increasing the top income tax-rate from 45% to 50% for those earning over £150,000. The government did not go that far, but it increased the number of earners who will pay the current top rate of 45%.
There was also the halving of the capital gains tax allowance, from £12,000 to £6,000. But in reality this is mostly a blow to small investors rather than those whose main income comes from capital gains. A budget that genuinely asks those with the most to contribute more would have increased the tax rate from its current level of 20% to something closer to Germany’s 26% or the 34% rate in France.
The statement also mostly maintained current levels of benefits, which is what the vast majority of British people prefer. Only a minority (around 30%) were in favour of benefits not rising in line with inflation.
Amid those benefits, the government maintained the pension triple-lock, which ensures that pensions rise every year in line with inflation. This is fair and vital for poorer recipients – and also vital for the Conservative party, given that pensioners make up a significant section of their support when that general election comes around.
Peter Bloom, professor of management, University of Essex
For those hoping to see a rise in defence spending, the statement was cautiously optimistic. Hunt said he would not allow it to fall under 2% of GDP – and there is still a chance of an increase at a review later on. The government has said it needs to spend more to “meet the threats we face”.
At the moment, the defence budget is planned to grow from £14.2 billion this year to £19.5 billion in 2022-2023. The following year it will be reduced to £16.6 billion. While these figures are projections, it does show an apparent desire for both investment and cost effectiveness.
And there are more fundamental questions to to be asked beyond numbers on a budget spreadsheet. While the government continues to link defence spending to the spread of democracy (and a desire to view the UK as a responsible global citizen), the facts are more complicated.
Putin’s invasion was completely unjustified, but it does not change the fact that heightened military build-ups, whether by Nato, China, Russia, or the US, breeds more conflict and less peace. Continuing to link economic growth and job creation to military investment should concern us all.
Failure to address childcare costs
Jennifer Castaneda Navarrete, senior policy analyst, University of Cambridge
Although the adoption of the pay recommendations of the independent pay review bodies for the NHS and teachers is welcome, there is no mention in the statement of the working conditions in social care and childcare. The increasing cost and unavailability of childcare is exacerbating the cost of living crisis and pushing many women out of the labour market. An estimated 1.7 million women are prevented from taking on more hours of paid work due to lack of affordable childcare, resulting in up to £28.2 billion economic output lost every year.
Prioritising public services during difficult economic times is a sensible approach, however, the government could invest further in social care and childcare, recognising the long-term impact of these investments, such as unlocking talent to address skills shortages in the labour market and contributing to the levelling-up agenda.
Businesses will go under
Steve McCabe, associate professor, Institute for Design, Economic Acceleration & Sustainability, Birmingham City University
The Conservative party knows that supporting entrepreneurship is essential. What’s crucial is that there’s financial stability to create the levels of confidence for investment that will stimulate economic growth and the well-paid jobs which will lead to future prosperity.
Investing in infrastructure, energy provision and in education is essential. However, as the OBR has warned, high energy costs, interest rates and corporate taxes also reduce business investment.
And the general environment for UK business looks really dreadful. Talk of “levelling up” coupled with a somewhat grandiose vision of Britain becoming the next Silicon Valley needs to be measured against quite how difficult things are going to be in the immediate future.
A massive drop in living standards will have a profound impact on discretionary spending. Retail and hospitality, already reeling from the effects of the pandemic and spiralling energy costs, will be hit hard. The businesses which do survive will undoubtedly emerge stronger. But far too many businesses will go under – at great cost to economic growth, the exchequer, and young people in need of opportunity.
UK’s slower growth than eurozone
Supriya Kapoor, assistant professor of finance, Trinity College Dublin
The UK economy has reported slower growth this quarter compared to the final quarter of 2019, which was 2.1% higher. The IMF has forecast that the UK will have the slowest growth of all G7 countries next year. This is in sharp contrast to eurozone, where output growth has already exceeded the pre-pandemic figures.
All European countries are dealing with the aftermath of the pandemic, inflation and rising interest rates, so the current economic situation and political instability in the UK are more likely due to a worsening of the country’s finances following Brexit. A recent YouGov shows 56% of Britons certainly think leaving EU was the wrong decision.
During his autumn statement, Hunt admitted the UK is in a recession and has promised billions of pounds worth of spending cuts and tax hikes, something that no other advanced economy is doing. This immediately resulted in further depreciation of the currency against the dollar and a rise in gilt yields.
On the health front, the question is whether investing in social care and an increase of £3.3 billion in NHS funding will help UK health spending come close to EU countries. Currently the UK spends about 20% less than other European countries on per capita health spending
The Sunak government believes the UK’s £55 billion energy package will help businesses and households with energy bills, claiming this is the largest support plan in Europe currently. However, the introduction of the energy windfall tax has immediately reflected in a small drop in energy company share prices.
Regional inequality continues to grow
Tolu Olarewaju, economist and lecturer in management, Keele University
Annual inflation rates up to April this year for the poorest and richest 10% of UK households were 10.9% and 7.9% respectively, with inflation rates expected to hit 14% and 8% respectively by the end of this year. This is because energy and food costs, the major drivers of recent inflation, make up a greater proportion of household budgets for poorer households.
Inflation is also higher in the north than in the south-east of the UK. Burnley, Blackpool and Blackburn are the worst affected, with inflation above 11% in all three places. This is more than 2% points higher than in cities like London, Cambridge and Reading. There was no mention of this trend in the announcement.
Some regional disparities between poorer and richer areas of the UK were recognised by keeping investment zones, centred on universities in “left behind areas” to help build growth clusters. I expect further announcements on this will happen at the spring budget.
- ^ 40-year inflation high (www.theguardian.com)
- ^ recession warnings (www.reuters.com)
- ^ skipped the usual photocall (www.bbc.co.uk)
- ^ restore government credibility (theconversation.com)
- ^ September mini-budget (theconversation.com)
- ^ eye-watering (www.itv.com)
- ^ predicting (obr.uk)
- ^ to protect individuals (theconversation.com)
- ^ Mr Micawber (micawberprinciple.com)
- ^ £55 billion “black hole” (www.msn.com)
- ^ own accountancy rules (progressiveeconomyforum.com)
- ^ debt to GDP (www.statista.com)
- ^ longest recession (www.bbc.co.uk)
- ^ anti-growth coalition (www.theweek.co.uk)
- ^ Tory voters (www.theguardian.com)
- ^ Anaemic growth (www.economist.com)
- ^ hard times (en.wikipedia.org)
- ^ Austerity 2.0 (www.independent.co.uk)
- ^ George Osborne (www.cnbc.com)
- ^ record levels of investment (www.irishtimes.com)
- ^ cut to the bone (www.theguardian.com)
- ^ much lower (www.bankofengland.co.uk)
- ^ increased interest rates (www.bankofengland.co.uk)
- ^ Inflation: why you might be worrying about it more than you should (theconversation.com)
- ^ enciktepstudio (www.shutterstock.com)
- ^ goal of growth (www.gov.uk)
- ^ £50 billion hole (www.reuters.com)
- ^ today announced (www.gov.uk)
- ^ Sir Michael Barber (www.gov.uk)
- ^ previous promotion (www.edfenergy.com)
- ^ evidence (www.health.org.uk)
- ^ Shutterstock/chrisdorney (www.shutterstock.com)
- ^ constrained funding (www.health.org.uk)
- ^ cap on care costs (www.lgcplus.com)
- ^ recent survey (www.ipsos.com)
- ^ Shutterstock/Dima Zel (www.shutterstock.com)
- ^ significant section (yougov.co.uk)
- ^ increasing cost (www.coram.org.uk)
- ^ 1.7 million women (wbg.org.uk)
- ^ £28.2 billion economic output lost every year (wbg.org.uk)
- ^ long-term impact of these investments (wbg.org.uk)
- ^ slowest growth (www.bbc.co.uk)
- ^ wrong decision (yougov.co.uk)
- ^ immediately resulted (news.sky.com)
- ^ about 20% less (www.ft.com)
- ^ small drop (news.sky.com)
- ^ expected to hit (ifs.org.uk)
- ^ south-east of the UK (www.centreforcities.org)