The UK Chancellor of the Exchequer, Jeremy Hunt, delivered the government’s Autumn statement on Wednesday, November 22nd. The annual address to the House of Commons is an opportunity to update the country on the state of the economy and to announce new changes to taxation and government spending.
The Conservative government set out plans which they described as constituting ‘The largest ever tax cut for workers.’ These included cutting National Insurance contributions, a move set to benefit 27 million Brits, a boost to the state pension of 8.5% and tax advantages for venture capital trusts.
Did inflation fall?
It came after inflation fell from 11.6% to 4.6%, meeting Prime Minister Rishi Sunak’s pledge to arrest rising prices. The PM credited the fall in inflation with making the latest tax cuts possible. He said:
“Now that inflation is halved and our growth is stronger, meaning revenues are higher, we can begin the next phase and turn our attention to cutting tax.”
But critics of the plans have called into question the extent to which these fresh measures will benefit UK taxpayers, pointing out the tax burden remains at its highest level since World War 2.
Implications of Stealth Taxes
The Spectator’s Fraser Nelson accused the chancellor of implementing £40 billion in stealth taxes, twice as much as the £20 billion worth of cuts announced on Wednesday. By choosing to freeze income tax thresholds, 4 million low-paid workers will be ‘dragged’ into paying income tax, while a further 3.4 million will be brought into higher tax brackets.
The Office for Budget Responsibility (OBR), the independent public body which delivers analysis on UK finances, projected that as a result of the Autumn Statement, living standards will be 3.5% lower in 2024/2025 than they were before Covid – when living standards were already floundering below their pre-financial crash height. According to the OBR projection, real household disposable income will not return to pre-pandemic levels until 2027/2078. This constitutes the largest reduction in living standards since ONS records began in the 1950s.
The low-paid are set to gain some benefit from a planned increase in the minimum wage, which will rise to £11.44 per hour by April 2024, for all workers over 21 years of age – a 12.4% hike. But universal credit benefit payments will rise by just 6.7%, an effective cut when accounting for inflation. Targeting a cut at both National Insurance and benefit payments played into the chancellor’s central theme of ‘making work pay.’
However, some of the chancellor’s measures were praised by The Economist, who lauded his decision to make full expensing permanent as “the single biggest pro-growth tax reform he could have unveiled” and said it would go far to “undo the crushing effect of corporate taxes.” But the outlet attacked his spending plans as ‘not credible’, saying:
“The OBR calculates that some budgets would have to fall in real terms by an average of 4.1% per year after 2026 to make the government’s numbers add up. This is not credible. Britain has already been through a decade of austerity. The National Health Service in England has a waiting list 6.5 million people long. The prison system is full. Many school buildings are unsafe. In the coming years, Britain must cope with the pressures of an ageing society, the green-energy transition and rising defence spending. Mr Hunt promises better public-sector productivity, a worthwhile goal that is hard to pull off and unequal to the country’s needs. A fiscally responsible government would say that taxes have to rise.”
The Institute for Government, an independent think tank, mirrored the Economist’s dour assessment of public financing plans, warning real terms cuts could lead to “further substantial decline in performance” for unprotected areas of spending.
Implications for Pensions
Arguably the main beneficiaries of the Autumn Statement will be UK pensioners. Their inflation-busting 8.5% rise defied some pundits who had expected the chancellor to weaken the triple-lock guarantee. The increase means that those who began receiving their state pension after 2016 will see their weekly payments rise from £203.85 to £221.20, while those benefitting from the ‘old’ pension arrangements will see a rise of £156.20 to £169.50 per week. The chancellor said it was “one of the largest ever cash increases to the state pension, showing a Conservative government will always back our pensioners.”
In contrast, workers will only be £2.68 a week better off as a net result of the Autumn Statement, according to Shaun Moore of Quilter. This is a result not just of income tax threshold freezing, but because the announced cut to National Insurance follows a previous rise in the tax last year by Jeremy Hunt in a bid to fund Britain’s beleaguered social care sector.
The chancellor also announced reforms to the pension system. UK workers will now enjoy a legally enshrined right to ask their employers to pay into an existing pension pot of their choosing in the future – a measure billed as a ‘pot for life.’ The scheme aims to help consolidate pension funds, rather than having employees in potentially confusing situations with several separate schemes.
Speaking to The Times, Emily Campbell of Charles Russell Speechlys, praised the pot for life scheme but warned of unintentional consequences. She said:
“The Chancellor’s ‘pot for life’ reforms are likely to be popular amongst members, who will feel they have more control and oversight of their savings. The reforms also provide advantages to employers, who will be able to offer choice to members without fear of possibly falling foul of auto-enrolment rules banning incentives for auto-enrolment opt-out.”
“At the same time, one wonders how employers can be sure that members will have taken appropriate financial advice – especially given the types of free investment choices offered by SIPPs, which sometimes lead to heavy losses and complaints of misselling.” The Autumn Statement should be understood within the constraints of the government’s limited fiscal headroom, which by their own rules restricts tax and spending policies. The headline cuts to National Insurance belie that the overall tax burden remains historically high – while pensioners have emerged again as the clear winners of these new measures. Overall, the Autumn statement marks a continuation of Jeremy Hunt’s strategy, which is to preside over a steady, if stagnant ship, following the twin crises of Covid and Liz Truss’s mini budget.