Not quite Austerity 2.0; fiscal finances worsen

Much of the Autumn Statement was in line with media reports in the run-up, including the overall total for government measures of nearly £55bn annually by the end of the forecast period in 2027-28. That splits into £30bn of spending cuts and £25bn tax measures.

Impact on the economy: The degree of backloading means that fiscal measures announced in the Autumn Statement for next calendar year and even the year after look supportive for economic activity if anything. The planned extra fiscal tightening builds through the profile, but by 2025-26 still ‘only’ amounts to £26bn or around 1% GDP on the Treasury’s costings published today (less if you include measures taken since March 2022). The net effect of all the government measures announced since March, the Office for Budget Responsibility (OBR) calculate is to increase borrowing by £64bn in 2022-23 and £40bn in 2023-24.

That said, adding measures announced since March to previously announced measures like the freezing in income tax thresholds and higher corporation tax rates announced when Rishi Sunak was Chancellor, mean that overall fiscal policy is set to become less supportive for the economy moving into fiscal year 2023-34. The cyclically adjusted primary deficit (a proxy measure for the change in fiscal stance) falls from 3.1% of GDP in 2022-23 to 0.6% in 2023-24 on OBR forecasts.

Plenty of backloading: Most of the additional revenue raising measures in the Autumn Statement, though sizeable, are concentrated in the period from 2025-26. The tax measures are more evenly spread throughout the profile, though a large chunk of the measures in earlier years relate to windfall taxation on energy companies.

However, while the degree of backloading in these fiscal measures is welcome from the perspective of an economy looking like it is entering recession, it does mean that these measures are less likely to be implemented. For one, the economic forecasts could look very different by the time 2025 comes around and imply a different degree of fiscal pressure by that point. Second, by 2025 we could have a different government altogether given that a general election is due by then.

My forecast for peak Bank of England (BoE) rates at 4.5% looking a bit less stretched: The degree of backloading, including decisions on the energy price cap (which will increase to £3,000 in April, or a 20% increase), alongside decisions on the minimum wage (up just under 10% in April) and council taxes (more flexibility to increase council taxes by up to 5%) look likely to support inflation in 2023.

The measures were net stimulative, rather than showing a net fiscal tightening for the 2023-24 fiscal year, which will work against the probability of severe recession, but does support the likelihood of more BoE rate hikes in coming months and leaves my forecast for peak rates at 4.50% looking less stretched, especially when combined with measures noted above that likely support near-term inflation.

Summary of the main measures – tax measures skewed away from lower earners and spending measures backloaded: The most costly giveaways relate to the energy bill freeze (sticking with £2,500 through to April, then £3,000 for a further year for a typical user) and the extra £900 payment for households on means-tested benefits, extra NHS and social care funding, as well as the decision to stick with former Chancellor Kwarteng’s decision to reverse the National Insurance Contribution (NIC) increase and cancel the Health and Social Care levy. The measures raising most revenue/lowering most spending, beyond the windfall taxation measures, and by the end of the forecast period, are first and foremost the decision to restrict growth in departmental spending to 1% in real terms (0% in cash terms for capital investment, i.e. falling in real terms) from 2025-26. That would clearly represent a tight spending settlement. Other big revenue raising measures include sticking with the decision to maintain the basic rate of tax at 20% and maintaining the secondary threshold for employer NIC contributions at the current level.

The OBR economic forecasts are relatively grim, though less so than those from the BoE: The OBR think that the UK is already in a recession starting in Q3 2022 that will last just over a year and forecast the unemployment rate peaking at 4.9% during 2024. They assume that inflation falls sharply next year though still manages to average 7.4% on the Consumer Price Index (CPI) measure, eventually dragged below zero before rising back towards 2% again. They also forecast a 9% fall in house prices by Q3 2024.

Stark illustration of interest rate sensitivity of public finances: The OBR note that based on government policy as it stood in March, their forecast for government borrowing would have been £75bn higher by 2026-27 and that around two-thirds of that reflected higher debt interest costs. The OBR also point out that the “near-tripling of interest rates since March” means that the public finances are “more vulnerable to future shocks or swings in market sentiment” with a forecast that 8.5% of revenues will be consumed by debt servicing by 2027-28.

New fiscal rules forecast to be met, but…: The OBR assess that the current fiscal rules – in legislation – are set to be missed. However, the Chancellor announced what was effectively a bit of a relaxation in the fiscal rules… and these look set to be met. Debt to GDP needs to be falling in five years’ time and the total budget deficit now needs to be 3% GDP or less in five years’ time. The main highlighted measure of public sector debt (ex-BoE) rises to 97.6% of GDP in 2025-26 on the OBR’s forecasts which would be a 63-year high. The main measure of the deficit meanwhile is still above 2% GDP by 2027-28.

Summary: No dive into Austerity 2.0; fiscal finances worsen: Overall, although the government announced a significant fiscal policy tightening in the Autumn Statement, it is backloaded. Against a worse economic backdrop, the OBR’s latest set of fiscal forecasts look substantially less healthy than in March, with the main measure of the deficit on average £61bn higher a year.

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