UK chancellor Jeremy Hunt laid out his plans for the British economy today. The statement was made against a backdrop of a more than 40-year inflation high and recession warnings from the Bank of England.
Hunt skipped the usual photocall with his red ministerial box, since this is an autumn statement rather than a full-blown budget. The main aim of the statement is to restore government credibility following the disastrous September mini-budget from the previous chancellor Kwasi Kwarteng. To do this, Hunt said before the announcement that he would be making “eye-watering” decisions about tax rises and spending cuts.
We asked a panel of experts to analyse whether the government has achieved these twin aims of stabilising the economic picture and addressing a dire cost of living crisis.
Filling ‘black hole’ will hit growth
Phil Tomlinson, professor of industrial strategy, deputy director centre for governance, regulation and industrial strategy, University of Bath
The new chancellor has adopted the persona of Mr Micawber of Charles Dickens’ David Copperfield – whose happiness depended on living within his means. The chancellor wants to fill a £55 billion “black hole” in the public finances. This is the gap between the Office for Budget Responsibility (OBR) forecasts of national debt and the government’s own fiscal target to reduce public debt as a proportion of national income over the next five years. To do this, the chancellor has announced a combination of public spending cuts and tax rises. This is a political choice rather than one based on economics. The black hole arises from the government’s own accountancy rules and highly uncertain forecasts.
Unlike ordinary households, the UK government has an infinite amount of time to repay its debts. And, as a currency issuer (exchange rate and inflation risks aside), it can always repay debts denominated in sterling. The UK’s debt to GDP ratio is also the second lowest among the G7 group of nations. So, the government actually has scope to invest in the economy.
The announced fiscal tightening will reduce demand in the economy and hit critical investment in public services and infrastructure. This is at a time when the UK is entering what is expected to be the longest recession since records began. Some might suggest the chancellor has joined the “anti-growth coalition” because the measures announced today will hurt growth. These cuts will also feel like a betrayal to Tory voters who bought into the promise of levelling up.
Anaemic growth has plagued the UK for more than a decade. Micawber eventually triumphed over adversity by borrowing to purchase a ticket to start a new (and successful) life in Australia. Public borrowing to invest in the UK’s dilapidated public services, research and development, green technologies and infrastructure would boost the supply side of the economy, increasing productivity and stimulating growth. Instead, the autumn statement is a return to austerity and hard times.
Ukraine war will affect plans
Shampa Roy-Mukerjee, associate professor in economics, University of East London
Spending cuts announced in the autumn statement have been widely dubbed “Austerity 2.0” since they follow 12 years of austerity measures implemented by previous Conservative chancellor George Osborne. But there are some major differences between the two and the impact they will have on UK households and businesses.
First, the 2010 austerity measures were introduced after public services had enjoyed record levels of investment by the previous Labour government, leaving more scope for cuts. With no real term investment in public services since 2010, many are already cut to the bone.
Second, when austerity cuts were introduced in 2010 the economy was growing, albeit slowly. But the Bank of England has announced a UK recession for the next eight quarters – one of longest in recent history. More deep cuts to public services will negatively impact growth.
Third, in 2010 inflation was under control and interest rates were much lower than today, hovering around 1%. This allowed the Bank of England to carry out quantitative easing (QE – increasing the money supply) to grow the economy after the 2007-8 global financial crisis. This is certainly not the case now as the bank has ruled out such measures and has steadily increased interest rates to 3%, so far, to control inflation.
High interest rates increase the cost of borrowing for households, businesses and the government, negatively affecting future investment in the economy. Labour markets are also tighter than ever and the shortage in skilled labour in public services and in private businesses is preventing economic growth.
The government’s ability to balance economic growth and commit to fiscal discipline amid one of the worst economic downturns in recent history will also depend on global events. Russia’s war in Ukraine, China’s COVID lockdowns, as well as the ability of the UK to forge trade and foreign investment deals post-Brexit will all affect the success of Hunt’s plans.
Chancellor announces more spending
Jonquil Lowe, senior lecturer in economics and personal finance, The Open University
The government’s expected spending cuts and tax rises, set to reach £30 billion and £24 billion respectively, were difficult to spot. Instead, the chancellor appeared to be announcing more spending on health, social care and education, while promising continued help with energy costs and the cost-of-living crisis.
But in the shadows loomed stealth taxes and public service “efficiency savings” as inflation rates continues to bite, with the OBR predicting that living standards will fall by 7% over the next two years
Starting with income tax, the thresholds of personal allowance (£12,570) and higher-rate tax (£50,270) will now remain frozen until April 2028. So too, will the threshold for national insurance (also £12,570).
This means that as incomes rise (even if not by enough to counter the impact of inflation) more people who were previously non-taxpayers will start to pay tax, and more basic-rate taxpayers will slip into the higher-rate bracket. More people will also pay the 45% rate as that threshold drops from £150,000 to £125,140.
From April 2023, households will also see a bigger rise in council tax bills, as local authorities are given the freedom to increase them by up to 5%, which includes 2% to meet social care costs. Plans designed to protect individuals from bearing catastrophically higher care costs have been delayed for two years.
Meanwhile, the energy price guarantee which shields households from the full impact of soaring global energy prices is set to be extended by 12 more months from April 2023. Although energy costs will still rise, the “typical” household will see their energy bills capped at £3,000 a year (up from the current £2,500).
Surprisingly the guarantee will continue to apply to all households, not just the most vulnerable. But the government is consulting on restricting this state support in the case of those who use very large volumes of energy. It has also said it will look into improving social tariffs for vulnerable households.
There will be a repeat roll out of cost-of-living payments in 2023-24, with £900 for households on means-tested benefits, £300 for pensioner households and an extra £150 for individuals on disability benefits.
Benefits and state pensions will go up by 10.1%, in line with September’s inflation rate. But the government is going ahead with plans to put pressure on working-age claimants to increase their hours or earnings. It is not clear whether this will include sanctions for those who don’t succeed.
The Conversation will be adding more expert comments throughout the afternoon.