Schroders Senior European Economist & Strategist Azad Zangana gives his initial response to Chancellor Jeremy Hunt’s announcement.
Yesterday’s statement was about providing near-term support for the economy, which is likely to already be in recession, while re-assuring financial markets that the government will reduce borrowing over the medium to long-term.
The new Chancellor, Jeremy Hunt, avoided the mistake of his predecessor and instead involved the independent Office for Budgetary Responsibility (OBR) in providing a fiscal and economic forecast.
Amongst the plethora of announcements, the most important were around energy bills, benefits, pensions and personal taxes. The so-called energy price guarantee will now have its cap for the average household dual tariff annual bill lifted from £2,500 to £3,000 from April 2023, and remain in place for a further 12 months. This is less generous than the original plan to cap bills at £2,500 for two years. Other support measures were also announced for more vulnerable households.
Disability benefits, pensions credits, and the state pension will all be uplifted in line with inflation (10.1% for the reference month). Meanwhile, the threshold for the additional rate of income tax (45%) will be lowered from £150,000 to £125,140, pulling many more individuals into the highest tax bracket.
Departmental spending will generally increase in nominal terms over the next two years, but then rise by 1% in real terms from there on. This means that departments, will have to find ways to cut spending in real terms in the immediate future. Additional funds were allocated for education, healthcare and adult social care, but the majority of other departments will struggle.
There was also emphasis on maintaining capital expenditure, and focusing on drivers of growth, including energy security, infrastructure and innovation. The first new nuclear power plant in 30 years will be approved, which is seen as crucial for boosting capacity. However, the introduction of vehicle excise duty on electric vehicles from 2025 (currently exempt) will reduce the incentive for those considering switching to the greener form of transport.
In terms of the outlook for the economy, the OBR has revised up its forecast for growth for 2022 from 3.8% to 4.2% since its last forecast in March, but has slashed its 2023 forecast from 1.8% to -1.4%, largely owing to the inflation crisis at present. The economy is forecast to return to positive growth of 1.3% in 2024 and 2.6% in 2025. CPI inflation is forecast to average 9.1% in 2022 and 7.4% in 2023, before falling to 0.6% in 2024 and -0.8% in 2025. Meanwhile, the unemployment rate is forecast to peak at 4.9% in 2024, before slowly falling back in subsequent years.
The OBR’s analysis suggests that the measures announced in the Autumn Statement reduce the depth and length of the recession this year and next, but leave the economy on a similar growth trajectory over the medium term. The latter should disappoint the government as it suggests its efforts to lift growth in the medium term are not expected to make a difference.
In terms of the public finances, the OBR sees the deficit rising from 5.7% of GDP to 7.1% of GDP this financial year, before falling to 5.5% in 2023/24 and 3.2% in 2024/25. The measures outlined mean additional borrowing of £4.1 billion this year and next, before more significant austerity begins. Most of the additional tax revenues will arrive in 2024/26, while the spending cuts will help from the following year.
Overall, a pretty bleak budget for many, and despite stating that inflation is the enemy, many of the measures announced do little to reduce inflation. A similar approach to the past has been taken. Borrow more now, promise to borrow less in the future. But at least with this fiscal statement, there is a promise to tighten belts at some point. Market reaction: sterling down against both US dollar and euro, gilt yields higher, but nothing as dramatic as the last mini-budget.