Autumn Through Spring: Reflections on the Statement and Predictions for the Budget Chewing Over the Autumn Statement

28 February 2024 - Luke Morris

I start with a huge apology.

Marketing professionals always (note: always!) advise that you should never do this.

But in this instance, I make an exception because my apology is to my own marketing team.

Let me explain.

It all goes back to the Autumn Statement of 22 November 2023. I was scheduled to pen an article for “immediate release”. A hot take.

But I just could not bring myself to do it.

Hunt’s opening salvo was an insistence that “our choice is not big government, high spending and high tax because we know that leads to less growth, not more. Instead we reduce debt, cut taxes and reward work”.

He said that the government “has taken difficult decisions to put the economy back on track and halve inflation” but “the work is not done”. He said that his priorities were to avoid big government spending and high tax, and instead cut taxes and “reward hard work” with 110 “growth measures” for business being announced.

The intended headline grabber was on National Insurance, cut by two percentage points for workers and simplified for the self-employed: “abolishing the compulsory Class 2 charge and cutting Class 4 National Insurance”.

Many firms of accountants dutifully trotted out the same in their press releases. “The reduction from 12% to 10% for employees is estimated to put £450 back in the pockets of your ‘average’ worker, a tax cut costing £8bn a year”.

So, why my grump? Why didn’t I just trot out the same line as the other firms?

It’s certainly a brave professional who chooses to irk his marketing team…

The reason was because I could not square Hunt’s statement with all of the facts:

  • Reducing debt? At the time of the Autumn Statement the OBR data saw debt continuing to rise and borrowing well above pre-pandemic levels. Public Sector net debt being reported as 97.9% of GDP and forecast to continue rising until March 2025.
  • Cutting taxes? According to the OBR the overall tax burden was reported as 36.2% of GDP for 2022/23 (the last time it was this high was 1949/50), forecast by them to rise still further to a post-war high by 2027/28. (The OECD average is around 34%).

The elephant in the room on tax, as my partner Graham Doubtfire of this parish often reminds me, is “fiscal drag”. In 2021, then Chancellor Sunak, froze personal tax thresholds until 2026. Hunt confirmed the freezes until 2029. The OBR says that the UK government will pocket £44.6bn in 2029 thanks to this policy.

Let me be clear: this is equivalent to raising the basic rate of income tax from 20p to 26p! Hardly a tax cut.

  • Rewarding work? This statement at least seemed a little more honest, given the NI changes proposed, costing £8bn a year. I understand the sentiment in targeting NI: the more people that work, the more the economy grows, and the wealthier everyone feels.

However: fiscal drag. NI may have been cut, but millions of people have already been pulled into a higher tax bracket in recent years. And recent data on workers, which I explore below, does not bode well.

So, following the long-standing advice of my dear-departed Grandma, since I did not have anything good to say, I said nothing.

No hot take this time, more a cold review. Sorry, Marketing.

Looking Towards the Budget

I’m feeling a little less grumpy now, mainly as I am looking forward to seeing everyone for breakfast at our Budget event on 7 March (it’s booking up but you can still reserve your place here: Spring Budget Breakfast 2024 | Eventbrite).

Going into the Budget, let’s look at the material factors and how they are all closely related:

Recession. Official data from a couple of weeks ago showed that the UK economy fell into a “technical” recession at the end of 2023 (GDP contracted in the third and fourth quarters of last year thus meeting the accepted criteria of two consecutive quarters of negative GDP growth).

I can’t really get too excited about this.

Even if the data had shown something different (and it may well yet be revised…) the post financial crisis environment has been one of stagnation, an average of zero growth since 2008.

Calling it a recession now, for technical reasons, simply reinforces something we have all felt for some time: mortgage costs up, food prices up, gas and electricity costing more, all impacting the “cost of living”.

The government blames the Bank of England and higher interest rates. The Bank of England blames Russia’s actions in Ukraine. Whilst both undoubtedly have an impact, I tend to think the bigger issue is workforce participation. And this is what the ONS has said, with its Chief Economist pointing out, “If more people were in work, consuming and producing, we would have higher GDP numbers”. Difficult to argue with that.

An Increase in Worklessness? The rate of unemployment is at almost historic lows, around 3.8%, but what this statistic does not factor in is the millions not looking for work. The number of out-of-work benefits has risen to 5.6m, levels not seen since the dark days of lockdown, and before that since the early-1990s. Furthermore, some 4,000 new applications for sickness benefits are presently being submitted every day.

The difference with the 1990s is that there are jobs available now. Back then there weren’t.

Why is this? The response to the pandemic was clearly a huge factor and things seem not to have bounced back. Is it older workers reassessing their lifestyles and not returning to work? Is it that medical and welfare services have not been able to cope with health issues? An explosion in net migration? The changing nature of our economy? I am not sure that Ministers have the answers (or are at least not facing up to the issues).

One thing is clear: an increasing welfare bill causes a headache for the Chancellor’s tax-cutting ambitions. Facing up to the issues (remember the pension triple-lock?) is walking a political tightrope.

Inflation. What I find both hilarious and insulting at the same time is the government’s claim that raging inflation is outside of its control and due solely to global factors, whilst simultaneously claiming that is they who have brought it under control.

Energy costs are a significant component of inflation. Restraining my cynicism for a moment on the bigger matter of net zero targets, Ofgem recently announced changes to the energy price cap from April – falling by 12.3%. This will be used for inflation forecasts, which the Bank of England forecasts at 2.1% by the middle of the year. This will give the Monetary Policy Committee some room to consider reducing interest rates, currently 5.25%, at its next meeting.

The Politics

So, falling energy prices, talk of tax cuts, inflation under control, interest rates on a downward trajectory… Anyone would think an election was coming!!

The next general election must be held no later than 28 January 2025. So contrary to reports, it may be the best part of a year. I have heard 14 November rumoured.

Budgets are always political. Budgets in election years more so.

Starmer and Sunak, as politicians, are essentially managerial technocrats. They are both wedded to what the OBR projects. Each is big on detail but small on vision. The embodiment of the tinkering of the past 16 years post financial crisis.

Pandemic money-printing has scarred us with rampant inflation and fiscal drag. As a result, borrowing is 98% of GDP (levels last seen in the early 1960s) and tax take is 36% of GDP (the highest it’s been in 75 years). The past 12 months has seen 5 years’ worth of price rises built into the voter’s cost of living. Unsurprisingly as a result, inflation is now “under control”.

The OBR projected just £10bn to £20bn of headroom for the Chancellor at the time of the Autumn Statement. This is not enough to make good on the promises he wanted to deliver. Nor is it as much as Labour would have wanted, should they win the election.

The predictable retail-offer to voters may well be “tax cuts”. But given the headroom, and the nature of the people making the decisions, I expect only more modest technocratic tinkering. The only real way to cut taxes is to significantly cut public spending and deal with the hot potatoes of productivity and workforce engagement. That takes vision and leadership, and I cannot see it happening in an election year.

There seems to me to be a very serious and very difficult to solve problem of people being workless and not looking. There seems to have been a big problem with productivity for decades. The problem of affordable housing is a cruel one to inflict on young people. Could it be that “experts” tinkering with the economy for a generation might not have helped?

But, back to the politics, according to IPSOS about 55% of the electorate are already decided as red or blue. Such muscle memory requires little cerebral activity.

So the real question is, what will be the retail offer to the 45% of voters who will decide the outcome?

It appears to be the same for both Sunak and Starmer:

“Stick with our responsible plan, don’t go back to square 1. Don’t vote for him.” (Sunak).

“We have a responsible plan, we have made hard decisions to sort our party out and have credible ideas to deal with the past 14 years of lacklustre government. Don’t vote for him.” (Starmer)

In a low growth environment, neither manager would advocate significant tax cuts at the current time as, without tough decisions being made, money would effectively have to be borrowed to fund them.

So I am betting that “responsible plan” will be Hunt’s buzz phrase on 6 March, and the ground where the electoral battle for the 45% will take place over the course of the year ahead.

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