Asset Intelligence Comment: Autumn Statement 2022
By Kel Nwanuforo
As has become even clearer since it was dissected every which way by the Sunday papers, ‘sunshine and lollipops’ this Autumn Statement was not.
Jeremy’s hunt for the UK’s credibility led to the Chancellor announcing a punishing package of spending cuts and tax rises – just as Britain embarks on the early phase of a two-year recession.
This was an early Christmas present that nobody wanted. Put simply, the situation now facing the average Brit is that of their taxes, mortgages and energy bills all heading in the same direction: up. Lumps of coal all round.
That said, one stakeholder was largely pleased – that faceless agglomeration we call ‘the markets’. In stark contrast to the reception meted out to Kwasi Kwarteng’s equivalent Statement two months ago – and does it not feel like longer than that? – the value of Sterling, as well as the cost of government borrowing, barely shifted in the hours after Mr Hunt’s speech. Both have recovered over the past few weeks.
So the case can fairly be made that the Chancellor has done what he set out to do: prioritise financial stability and credibility above all other considerations. One of those, incidentally, is the little job of promoting economic growth, about which the Statement arguably did not have much to say. What a turnaround from the short-lived approach of Liz Truss.
Indeed, that was perhaps the most remarkable thing about this Statement. For the sheer, screeching ‘u-turn’ on the overall approach, as well as several individual policy measures, from the same political party within the space of less than two months, it is utterly unprecedented.
Remember: in September, Liz Truss and her ministers were telling us that the top rate of tax needed to be abolished to encourage wealth creators to set up in the UK – and that it did not raise much revenue anyway. Now under Rishi Sunak, the rate remains in place and its importance is apparently such that it now covers more workers than ever before.
Two months ago, the government did not believe in windfall taxes as they stifled investment in the energy sector. Now these have been increased and spread to electricity producers too.
Two months ago, the government prioritised fostering investment above almost all else. Now dividend and capital gains taxes have been raised considerably.
So the optics are undoubtedly a bit odd. What about some of the substantive details?
One smart judgment in the package is that departmental spending cuts will only begin in 2025. Not only is this after the next general election – conveniently – it gives the economy breathing space in the short-term. (Like tax rises, government spending cuts stifle economic growth.) Cynics will wonder whether these cuts will ever actually happen – whichever party wins next time around.
This is especially the case as the Chancellor has also resurrected another innovation: the government is now mandated to hit its debt targets on a rolling five-year basis. This means that, each year, as long as forecasts show that the government is on track to meet the goal within a five-year timeframe then it will deem to have passed the test. Again, cynics will note that on this basis, ‘five years hence’ never actually arrives…
Another welcome policy is the large increase in the National Living Wage scheduled for April. This will of course make a real difference for low-paid workers struggling with high living costs. Yet there will also be a benefit to the economy as a whole. Those on lower pay tend to spend any extra cash rather than save, so this could help to prop economic output up over the months ahead.
And we will need all the help we can get on that score, as the latest projections from the Office for Budget Responsibility (OBR) were grim indeed. According to the independent body’s latest forecasts, the UK is facing the steepest decline in real incomes in recorded history; half a million more jobless and a 9% fall in house prices over the next 18 months.
The picture is undoubtedly difficult and for a significant number of people, the winter ahead will feel cold in more ways than one. Yet, with its ‘sound money’ approach, the new administration does at least seem to have won the confidence of the financial markets. When the economic storm clouds clear, in time, that could provide a platform for the UK’s attractively valued stock market to recover.
Jeremy Hunt appears to be betting on it.
Key measures announced for England (national variations for Scotland, Wales and Northern Ireland may apply)
- The earnings threshold for the 45% additional rate of income tax will be lowered, from £150,000 per annum to £125,140
- Key thresholds for other income tax bands, National Insurance and inheritance tax all frozen until April 2028
- Dividend allowance to be cut from £2,000 to £1,000 in April, then reduced again to £500 in April 2024
- Capital Gains Tax allowance to be cut from £12,300 to £6,000 in April, then reduced again to £3,000 in April 2024
- Electric cars, vans and motorcycles to incur Vehicle Excise Duty from April 2025
Wages, pensions and benefits
- The National Living Wage will rise from £9.50 to £10.42 an hour from next April, a substantial increase of 9.7%
- The state pension, along with means-tested and disability benefits, will each rise by 10.1%
- The long-delayed lifetime cap on social care costs of £86,000, previously due to be introduced in October 2023, has been pushed back by another two years
- The government’s Energy Price Guarantee will be made less generous from April. A typical household will pay £3,000 per year for energy from then on, up from £2,100 currently
- Additional support of £900 will be made available for households dependent on means-tested benefits; £300 will go to pensioner households; and £150 for those in receipt of disability benefits
- The windfall tax on the profits of oil and gas firms has been increased from 25% to 35% and extended until March 2028. Electricity generators face a new 45% tax
- No support for business energy bills is pencilled in beyond April at present