Autumn Statement 2022: Restoring confidence?

The scale of the challenge facing Jeremy Hunt can be summed up in the following summary of the state of the UK’s public finances:

With the damage from Liz Truss’ short-lived growth experiment needing to be urgently repaired, the Chancellor adopted a balanced tone. The truth is that he has little leeway. And in fact, he’s not cutting spending in earnest until after the next General Election. That’s just a promise. Maybe for someone else to fulfil.

Public expenditure and national debt have risen because of Covid, because inflation jumped when lockdown ended, and because of the war in Ukraine through its impact on energy costs. The final blow is the added interest rate premium the UK is being charged after Kwarteng’s ill-fated ‘hit and hope’ Growth Plan.

What heavily constrain the Government’s options are that the public won’t tolerate substantial cuts in public expenditure and because we’re now in a recession, meaning tax receipts will fall, and benefit claims will rise.

The Chancellor’s plan involves taking £55bn out of the public finances through equal contributions from increased taxes and eventually cuts in spending. He has signalled all sorts of initiatives to make the economy more competitive, to drive growth, and to pull people back into work. He has given Sizewell C the green light, announced new mayors and devolved powers for English regions, sustained commitment to COP 26 green house gas reduction and loosened Solvency II provisions around insurance company reserves to give them wider investment scope. His commitment to supporting the most vulnerable sees extra money for the NHS and social care and the State Pension Triple Lock remains with an £870 a year rise for pensioners in April 2023.

One of Kwarteng’s mistakes was to deliver spending plans and tax cuts with no supporting forecasts from the Office of Budget Responsibility (OBR). Markets were appalled. Jeremy Hunt did not repeat that mistake. But it is worth taking stock of their conclusions. They have forecast the worst contraction in living standards in 60 years. Real disposable incomes will fall 4.3% this year, the worst outcome since 1957.

The OBR also suggest that despite relaxing the existing fiscal rule which requires national debt to fall as a % of GDP within three years, to give himself an extra two years to bring down spending, Jeremy Hunt’s margin of error – in the forecast for 2027 – is only £10bn. Within a public spending total of £1.3 trillion, that’s less than 1%.

But what did markets think? When Jeremy Hunt rose to give his speech 10 year UK gilts were yielding 3.16% (Source: marketwatch.com) and they had not moved by the time he sat down. Obviously this is a far better outcome than Kwasi Kwarteng achieved. He saw rates rise from 3.5% to 4.5% within a week and was soon on his way out of office. Jeremy Hunt looks like he’s passed his first test, the market reaction, and will hope that events do nothing to make his task even more difficult.

Important tax changes

• Personal allowance, Basic rate band, National Insurance bands – frozen in cash terms to 2028.
• Additional rate tax (45%) threshold reduced from £150,000 to £125,140. This creates an effective marginal 60% tax band from income of £100,000 to £125,140 as the Personal Allowance is tapered away.
• CGT annual exemption cut from £12,300 to £6,000 from April 2023, and to £3,000 in 2024
• Dividend allowance cut from £2,000 to £1,000 from April 2024, and to £500 in 2024
• No increase in ISA subscription levels.

Client conversations

Saving is a sore point at the moment. Household savings ballooned during Covid but have fallen to zero. But for higher earners the tax gearing on pension contributions remains attractive, to the point above £200,000 that the tapering of the £40,000 annual allowance begins to take the incentive away.

One aspect of Kwasi Kwarteng’s budget that has been retained is the extension of the Stamp Duty waiver for first time buyers to £425,000, up from £300,000. But this will be reversed in April 2025. There may come an opportunity to investigate supporting junior family members with a move onto the property ladder.

With the CGT allowance being sharply reduced, crystallising any gains in GIAs before April 2023 with appropriate use of inter-spousal transfers will be on everyone’s action checklist. In their forecasts the OBR suggest a gain on UK equities of just 12.5% over the next 5 years. A reminder that expectations not grounded in the current reality need to be kept firmly under control.

Source of data unless stated otherwise is OBR's Economic and Fiscal Outlook November 2022.

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