Reform analysis: Autumn Statement 2022
In his much anticipated Autumn Statement, the Chancellor told us his priorities were “stability, growth, and public services”, and that £55 billion of consolidation would come 50:50 from tax and spending cuts.
To tax… that old friend ‘fiscal drag’ is delivering a hefty chunk of the increased revenue: freezing the employer NI threshold nets the Government a tidy £25 billion between now and 2027-8. Implementing the global minimum corporate tax reforms is also a sizeable revenue stream (around £2bn a year). Reducing the income tax dividend allowance and cutting the 45p tax threshold to £125,140 are much smaller, but still notable, cash contributors.
Taxing energy company profits is the other (very) hefty revenue stream. The energy profits levy (windfall tax) extension and rate increase delivers an additional £19.4 billion between now and 2027-8, while a new Electricity Generator Levy (excess returns tax) will provide a further £14.2 billion over that period. Next year alone will see almost £15 billion from these two taxes.
And public spending? Total Managed Expenditure (TME) was 44.7% of GDP in 2021-22 (over £1 trillion). TME is set to account for a huge 47.3% of GDP by the end of this financial year, remaining at that level in 2023-34 (47.2%), before dropping to 43.4% by 2027-8. Or, to put it another way, we have more spending in the short-term, with that fiscal consolidation backloaded. Arguably sensible given the economic context. The savings largely come from 2025-26 when day to day spending is capped at a 1% real terms increase, and capital spend is frozen in cash terms.
Notably for a think tank with a long history in championing value for money, the Chancellor announced that “To help identify further savings in departmental budgets” he is launching “an Efficiency and Savings Review. The Review will target increased efficiency, reprioritise spending away from lower-value programmes, and review the effectiveness of public bodies. Savings will be reinvested in public services, and the government will report on progress in the spring.” We approve. And speaking of efficiency, we’re delighted to see that Patricia Hewitt will be leading an independent review of integrated care boards to consider how to ensure they are operating efficiently with the right level of autonomy and accountability.
How will this all feel? Pretty brutal. The OBR forecasts real household disposable income per person will fall by 4.3% this financial year, and by a further 2.8% the following year. We’re going to get much poorer. And at the same time, it’s hard to see how our experience of public services won’t deteriorate. We may not have cuts to departmental spending envelopes, but, with the exception of health (obviously), social care (good), and schools who all received additional cash injections, everyone else is going to have to make cuts just to stay within their 2021 Spending Review allocations — that’s the inflation effect.
So all in all, there were, as the Chancellor rightly said, no easy answers, but this feels a reasonable attempt to deliver a balanced package in the toughest of circumstances.
Before we move to our usual good, bad and jury’s out, I leave you with one of the most terrifying data points from this fiscal event: debt interest payments this financial year are set to reach £120 billion (£108.5 billion the year after). For context, that's more than we spend on the (DEL) education budget, twice what we spend on defence, and almost five times the combined budgets of the Home Office and Ministry of Justice. No, you can’t borrow your way out of this.
👍 GOOD FOR
Cost of living crisis
There is only so much a government can do to alleviate cost of living pressures, and this Government has struck a pretty good balance between continuing some universal support and targeting additional measures at those that really need it. On the former, the energy price guarantee, curtailed by this Chancellor to 6 months from his predecessor’s two years, has been extended for a year at an increased rate (£3,000 instead of £2,500).
For those on the lowest incomes, there were several very welcome announcements. The big one: benefits will be uprated by inflation. In addition, for those on means-tested benefits there will be a further £900 in cost of living payments, and £150 for anyone on disability benefits. And for those on the lowest earnings, the National Minimum Wage will increase by almost 10%, benefiting over 2 million struggling workers. Add to this the inflation increase to the benefit cap (meaning no more ‘fiscal drag’), and the cap on the increase to social rents (though 7% is still pretty hefty), and this package offers real support to the poorest households.
There was also positive news on energy efficiency. The introduction of a new target — to reduce energy consumption for buildings and industry by 15% by 2030 (against 2021 levels) — sets a good level of ambition, one that will offer both financial savings and environmental benefits (if it’s actually achieved!). The announcement of an Energy Efficiency Taskforce equipped with an additional £6 billon of funding between 2025 to 2028 is similarly promising. As we argued in our 10 Graphs for the New PM paper back in September (aimed at Liz Truss but just as relevant to Rishi Sunak), our record on insulating homes has been pretty appalling in recent years. New measures to tackle this long-term failing in our energy infrastructure are undoubtedly good news.
👎 BAD FOR
Untargeted pensioner support
We’re unconvinced by the additional cost of living payment of £300 for pensioners. If eligibility for the means-tested payment works the same as last time, then the poorest pensioners, those in receipt of pension credit, will receive the £900. In contrast, the £300 is not linked to need, meaning a decent chunk of that £2.6 billion will go to people who are wealthy enough to manage without it. In a time of extreme public spending pressure, that’s not a good policy.
If you want good public services, you have to pay for them, and that (remember the debt interest payments) means taxes. But the problem with targeting employer NI for the lion’s share is that it’s a tax on jobs — doesn’t matter if you’re raking in the profit or struggling to get your business off the ground, this is a tax on employing people. The Chancellor is using a favourite tactic, applying a threshold freeze, which means more tax without actually increasing the rate. We get the need to raise more money, and that there are few taxes of the scale needed to shift the dial, but we’re not a fan of this fiscal drag.
⚖️ JURY'S OUT
The Chancellor’s decision to “refocus” the much-trumpeted investment zones is also a welcome announcement. This appears to mean a shrinking in the scope and scale of the zones, which will instead cover a “limited number of the highest potential knowledge-intensive growth clusters” in the country with strong academic institutions nearby. Given the fairly flimsy evidence that investment zones are actually able to increase overall growth (as opposed to displacing existing investments), this more targeted approach is a positive development. If they are focused on developing industrial bases in left behind areas, which they apparently will be, then they could be a valuable tool to support levelling up — we await the details on this one.
The announcement of a review of retained EU regulations across high-potential sectors of the economy — including life sciences, digital and financial services — is also welcome in principle. Coupled with a second new review led by Sir Patrick Vallance, focusing on regulation around emerging tech, it suggests a wider push to adapt rules across the most dynamic and innovative UK industries. With relatively little to go on in terms of specifics, the jury’s still out at Reform Towers, but the potential prize is significant. We’ll be keeping a watchful eye out.
🤔 Hidden in the small print
No doubt as we wonks pour over the Autumn statement documents in the next 24 hours new things will be uncovered. In the meantime, here are a couple of things we noticed that didn't make the Chancellor’s speech… Fuel duty is set to increase by 23% in March next year, increasing the price of petrol and diesel by around 12p a litre — let’s see if that one makes it through the Spring Budget — and the OBR is forecasting a 9% drop in house prices between Q4 2022 and Q3 2024.