UK Autumn Statement: Spending the windfall

Key policy measures in the UK’s Autumn Statement were largely as discussed in the media beforehand and included national insurance contribution cuts (although the cut to employee National Insurance Contributions (NICs) was 2pp rather than 1pp) and making permanent tax write-offs for business investment. There were also measures announced, for example, on welfare reform and planning.

This probably wasn’t an Autumn Statement that you’d necessarily describe as prudent…

The Chancellor has spent the ‘windfall’ gains from the boost to tax revenues from high inflation on measures designed to encourage work and business investment (and presumably also aimed at supporting their chances at the next election). However, the OBR (Office for Budget Responsibility) estimates that the NIC, business investment tax write-off and welfare reform measures will add (only) a “modest” 0.3% to GDP in five years’ time (they also point out that the tax burden still rises in each of the next five years on their forecast to 38% of GDP).

Challenges ahead

The Chancellor hasn’t increased departmental spending by much in this Autumn Statement. That continues to imply sizeable (potentially unrealistic) cuts in real terms spending for unprotected departments. The OBR note that “Despite an increase of £4.1 billion a year on average in this Autumn Statement, higher inflation means the real value of departmental spending is £19.1 billion lower by 2027-28 than our March forecast.” They point out that in previous multi-year spending reviews, the government has ended up significantly topping up departmental spending and now describe the outlook for departmental spending as a “significant and growing risk to our forecast”. The OBR suggest that the implied fall in spending “would present challenges” and note that “performance indicators for public services continue to show signs of strain”.

Whoever forms the next government may end up needing to increase departmental spending fairly substantially in nominal terms which would leave the fiscal finances looking weaker than they do in these forecasts.

Significant measures, but unchanged deficit forecasts

The most expensive measures for 2023-24 and 2024-25 were the capital allowance and NIC changes costing around £11bn and £10bn respectively by the time you get to 2028-29. By the end of the forecast horizon, i.e. 2028-29, there is a total net giveaway in terms of policy measures of £21.1bn, but even for the current fiscal year (which we are already more than halfway through) the net giveaway amounts to some £6.7bn (largely previously announced extra NHS funding and also the cut to employee NICs which is set to be effective from January 2024).

Despite all this extra spending and the OBR revising down their forecasts for real GDP growth for 2024 and 2025, the OBR’s forecast for the deficit is close to unchanged in most years compared to their March forecasts. That mostly reflects a better starting point and upward revisions to receipts forecasts, with the size of the economy in nominal terms bigger than the OBR had expected in March.

In terms of the overall state of the fiscal finances, public sector debt/GDP still takes until 2027/28 on the OBR’s forecast to stabilise and start to fall (at least on the ex-BoE headline measure). At that point debt interest spending is still forecast to be well above pre-pandemic levels as a percent of revenue (or GDP).

Planned fiscal tightening and no rate cuts for a while

The forecasts still imply fiscal tightening ahead. Taking into account all the past Budget decisions, and using changes in the cyclically adjusted primary deficit as a percentage of GDP as a proxy, the big picture for fiscal policy still implies net fiscal tightening in the years ahead. However, much of that fiscal tightening would be post-election, so the current government may not be in power.

Thinking about any impact on the Bank of England and the interest rate outlook though, this was a net stimulative Autumn Statement compared to the previous plans. Added to the nearly 10% increase in the minimum wage announced by the government yesterday, the Government haven’t given the Bank of England any reason to cut rates anytime soon and near-term risks stay on the side of another rate hike rather than a cut.

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