- Political analysis from Alex Davies, Director at Higginson Strategy
Jeremy Hunt will be grateful to the Office for Budget Responsibility (OBR) and the Office of National Statistics (ONS) for their pessimism last year in predicting the economy would “tip into recession” for a year from Q3 2022.
In the event, there has been moderate growth over the period and the OBR now says, “cumulative growth [is now] nearly 1 percentage point stronger in the first half of 2023 than our March forecast.”
This created a notional ‘windfall’ in the public finances of some £27bn extra in the economy than had been anticipated. Jeremy Hunt’s piggy bank having briefly been filled, he smashed it open in today’s “autumn statement for growth” which felt very much like a pre-election budget.
As we set out in this briefing, personal and business taxes have been cut. Employee national insurance rates will fall by two percentage points. Pandemic-inspired business rate reliefs will continue for a further year and previously temporary investment incentives have been made permanent.
The national insurance cut reverses a previous flagship government policy of a ‘health and social care levy’, which was represented by 1p on the rate of national insurance, ostensibly ringfenced for the NHS and social care.
This demonstrative investment in public services has been abandoned (rhetorically if not in practice) by placing £450 a year back into the pockets of those on £35,000, rising to £520 for the average nurse and £630 for the average police officer.
The measure will be introduced not in April 2024, as would be usual, but on 6 January 2024. The hurry to introduce this personal tax cut lends credence to the possibility of an April general election, emulating John Major’s surprise move in 1992, when he recovered from a trailing position in the polls.
Responding to the autumn statement, Labour was quick to say that growth – having now been revised into predictions for this year – has accordingly been revised out of forecasts for the coming years.
The shadow chancellor, Rachel Reeves, told the Commons that thirteen years of Conservative government had seen “growth hit a dead end, mortgages rising, high inflation, taxes eating into wages and public services on their knees”.
Much as Jeremy Hunt will hope that signs of a recovering economy will rescue Conservative prospects, that laundry list of alleged economic failure is likely to strike a chord with voters.
After all, the cost to the exchequer of Hunt’s tax cuts is high but the marginal impact on individuals is low. Many of those benefiting from modest tax breaks will have seen their mortgages or rent soar in recent months.
The past several weeks has seen at least three ‘resets’ for the government, first at the Conservative conference at which the prime minister cut green programmes claiming to be pragmatic and realistic; then at the reshuffle, where he moved his government back towards the political centre; and now at this autumn statement where the Chancellor hopes to show himself ‘on the side of working people’.
The previous two resets failed to shift the dial in the polls. Only time will tell whether real pounds back in people’s pockets (however few) may shift voting intentions back towards the Conservatives in the opening months of 2024.
Should Labour prevail in leading the next government, the economic inheritance will be more precarious than they enjoyed in 1997.
At that election, the government debt to GDP ratio was around 45 percent. It will stand at approximately 94 percent in 2024, with debt servicing remaining a significant draw on the public finances whoever takes office.
A business rates support package worth £4.3 billion over the next five years will support small businesses and the high street.
The small business multiplier will be frozen for a fourth consecutive year, and Retail, Hospitality and Leisure (RHL) relief will be extended. The standard rate multiplier will be updated in line with CPI inflation.
The government has also made available £4.5 billion to unlock investment in strategic manufacturing sectors – auto, aerospace, life sciences and clean energy.
The Made Smarter Adoption programme, which assists SME manufacturers to access digital skills, is to benefit from up to £16 million in 2025-26 and will be expanded to all regions in England.
An additional £500m funding for UK artificial intelligence over the next two years will create “innovation centres” to help make the UK an “AI powerhouse”.
This follows the UK AI Safety Summit which took place at the beginning of the month.
Mr Sunak also used his speech at the Global Food Security Summit on Monday to urge world leaders to harness artificial intelligence to end malnutrition around the globe.
Cuts to personal taxation
Class 1 employee National Insurance contributions (NICs) are to fall from 12 percent to 10 percent from 6 January 2024.
The main rate of Class 4 self-employed NICs will fall from 9 percent to 8 percent in April and Class 2 self-employed NICs are to be abolished altogether.
The OBR forecasts these changes will increase the number of people in employment by 28,000 by 2028-29, alongside a further substantial economic benefit from those in work increasing their hours.
National Living Wage
From 1 April 2024, the National Living Wage will increase by 9.8 percent to £11.44 with the age threshold lowered from 23 to 21 years old.
Those aged 18 to 20 will get at least £8.60 an hour from April, which is an increase of £1.11. For those 16 and 17, and apprentices, the minimum pay will be £6.40 – a rise of £1.12 on last year.
The government will maintain the ‘triple lock’ and uprate the basic State Pension, new State Pension and Pension Credit standard minimum guarantee for 2024-25 in line with average earnings growth of 8.5 percent.
The chancellor has also pledged to work to establish a pension pot for life scheme, giving workers the option to nominate the fund their employer pays into, which can follow them as they move throughout their working life.
A £320 million plan to help unlock pension fund investment for technology and science schemes was also announced.
Benefits will increase in April by 6.7 percent in line with September’s (higher) inflation figure rather than October’s (lower) inflation figure.
The government is reforming the Work Capability Assessment (WCA) so that more individuals, such as those with limited mobility and mental health conditions, receive the right support to find work where they can, rather than being automatically deemed unable to work or look for work.
Conversely, ministers propose to strengthen sanctions for those who choose not to engage with measures that help them find work as reflected in the Back to Work Plan. Jobseekers will be compelled to undertake a work programme where they have not found a job after 18 months.
If jobseekers are found not to be looking for work after six months, they will have benefits such as free prescriptions and legal aid removed.
Despite these measures, the Office of Budget Responsibility has forecast that the unemployment rate will peak at 4.6 percent in the second quarter of 2025, as GDP growth slows, and spare capacity opens up.
They note that labour demand has been weakening recently, with vacancies falling from a peak of 1.3 million in May 2022, to around 960,000 in October 2023. The employment rate is forecast to fall from 60.7 percent in the third quarter of 2023 to 60.2 percent in the second quarter of 2025, reflecting both rising unemployment and falling participation.
These changes also come after the chancellor froze thresholds for income tax, meaning that “fiscal drag” has meant that as people’s earnings increase, they are either brought into tax for the first time or moved into higher bands.
The three-year freeze on the Local Housing Allowance will end to support low-income households with increasing rent costs. The chancellor will also raise LHA rates to the 30th percentile of local market rents in April 2024.
The government pledged £32 million to “bust the planning backlog and develop fantastic new housing quarters in Cambridge, London and Leeds, which will lead to many thousands of additional dwellings”, as well as allocating £450 million to the local authority housing fund to deliver 2,400 new homes.
The government will legislate in the Autumn Finance Bill 2023 to increase the rate of Plastic Packaging Tax in line with the Consumer Price Index (CPI). The change will take effect from 1 April 2024.
The government will also consider introducing an escalator to the rate of Plastic Packaging Tax and minimum recycled plastic threshold in future.
Green energy and environment
The chancellor has announced £960m in investment in the green energy sector to accelerate growth.
The money, which will be used to fund offshore wind, nuclear, carbon capture, and hydrogen projects, is part of a £4.5bn investment package for strategic manufacturing.
Furthermore, people living closest to new pylons and electricity substations will receive up to £10,000 off their bills over 10 years.
The energy regulator, Ofgem, has supported the Connection Action Plan which aims to tackle the stark delays in the current connection queue by releasing over 100GW of capacity for new projects – around a quarter of the electricity needed to power the economy in 2050. The plan will cut the average connection timeline from five years to six months.
Ofgem is also welcoming the government’s Transmission Acceleration Action Plan published today. This sets out a programme to halve the time to build new transmission infrastructure – down from current average timelines of 12 and 14 years.
Despite a focus on green energy, the statement lacked any mention of further investments such as insulating homes and improving energy efficiency.
The government has committed to reforming the planning system to allow for faster planning applications. Local authorities will be able to charge more (recovering full costs) for major business planning applications, in return for meeting guaranteed faster timelines.
If they fail, these fees will be refunded automatically with the application being processed free of charge.
Ministers also propose to press ahead with ‘nutrient mitigation’ schemes which will see Briefing: Autumn Statement 2023 developments previously held back by ‘nutrient neutrality’ requirements go ahead.
The government also promised a consultation into new permitted development rights, which would allow any house to be divided into two flats, provided the exterior remains unaffected.
Political and campaigner reaction
Labour shadow chancellor Rachel Reeves said: “Going into this statement the Government had already put in place tax increases worth the equivalent of a 10p increase in national insurance.
“So, today’s 2p cut will not remotely compensate for the tax (increases) already put in place by this Conservative Government. The fact is that taxes will be higher at the next election than they were at the last.
Liberal Democrat Treasury spokesperson Sarah Olney said: “This is a deception from Jeremy Hunt after years of cruel tax hikes on hard-working families from this government.
“Conservative chaos has sent mortgages and tax bills soaring, today’s announcements won’t even touch the sides.
“Worse still was the deafening silence on health. These dismal forecasts show the economy is on life support and reducing NHS waiting lists is the shot in the arm needed.
“It is a no-brainer that we need people off waiting lists and back to work, yet this Conservative government simply doesn’t care.”
SNP economy spokesman Drew Hendry said: “Things are still getting worse for people. Inflation is still more than double the target that it should be and that means prices and costs for people in their homes are still going up day by day.
Mr Hendry said welfare changes proposed by the Government show the “nasty party is back in business”, adding: “This Government is on the record as working to the principle of let people die.”
Gina Miller, democracy campaigner and leader of the True and Fair Party said:
“Slightly higher than expected growth put some money in Jeremy Hunt’s piggy bank, and he’s chosen to smash it to smithereens this afternoon with short-term pre-election giveaways.
“Meanwhile our NHS remains in mortal danger, and the government’s welfare reforms threaten to put the most vulnerable at risk.
“He may not have used Suella Braverman’s words the Chancellor’s actions give every impression that he believes being unwell is a ‘lifestyle choice’.
“This statement was the last gasp from a government which is out of ideas, out of steam and out of road.”
Sian Sutherland, Co-Founder, A Plastic Planet & PlasticFree said:
“The ‘Green Industries Growth Accelerator’ has been unveiled, but the £960m in funding excludes plastic replacement technologies.
“And the woefully inadequate plastic packaging tax is to rise only by inflation. Yet again big oil’s plan B, plastic, is being shielded by Prime Minister Sunak’s government.
“Around the world governments are using judicious regulation and spending to stimulate the economy and fend off stagflation.
“But Britain has become a laughing stock on environmental issues while our competitors power ahead.”
Angela Madden, Chair of Women Against State Pension Inequality (WASPI), said:
“Maintenance of the triple lock is welcome but it’s cold comfort to 1950s born women who had their State Pension age increased without warning and have been suffering ever since.
“Only when the government’s mistakes and neglect have been remedied with fast and fair compensation can ministers really be said to respect pensioners.”