By Alice Pugh, Policy and Data Analyst – City-REDI
On the 22 November the UK Government announced the Autumn Statement, potentially the last Autumn Statement before the next general election. The purpose of the Autumn Statement is to update the Commons on the state of the economy, as forecast by the independent public finance forecaster the Office for Budget Responsibility (OBR), and announce tax and spending decisions. This piece looks at how the Autumn Statement is anticipated to impact households, businesses and public services.
The Institute for Fiscal Studies (IFS) has found that the changes to National Insurance Contributions (NICs) for employees and the self-employed will only give back less than a £1 for every £4 that has been taken away from households through changes to NICs and income tax since 2021. For instance, the IFS has found that for an employee on average full-time earnings of £35,000 per year, the NICs cut announced in the Statement offsets the impact on their incomes in 2024-25 of the freezes in income tax thresholds up to that point. However, the freeze in income tax will cause fiscal drag to continue to eat away at incomes each year, by 2027-28 they will by paying £249 a year more in direct tax overall.
The OBR expects fiscal drag will drag millions of people into higher tax brackets. From 2021 income tax and NICs thresholds were frozen, rather than increasing them in line with inflation. This means as wages have increased to chase inflation, greater numbers of people are tipped into the tax system or higher rates of tax; this is fiscal drag. The OBR anticipates that between 2022-23 and 2028-29, that as a result of freeze on thresholds nearly 4 million additional individuals will be expected to pay income tax, a further 3 million more will move into a higher tax bracket, and 400,000 more onto the additional rate. This represents an increase in the number of taxpayers in each band of income tax by 11% for the basic rate, 68% for the higher rate and 49% for the additional rate.
Whilst the government rhetoric states that taxes are coming down, this isn’t true, as the tax burden on workers is increasing due to the freeze of NICs and Income tax thresholds. Tax receipts will now make up 37.7% of GDP by 2028-29, largely as a result of these freezes.
Furthermore, IPPR found that for every £100 that the Chancellor has spent on personal tax cuts, £46 will benefit the richest fifth of households. Only £3 of every £100 of tax cuts will go to the worst-off families. The Resolution Foundation also had similar findings, revealing that 40% of the gains from the tax and benefit measures announced goes to the richest fifth of the population, with the top 20% gaining £1,000 on average, comparative to £200 in gains seen by the bottom fifth.
IPPR also found that the biggest gains from reductions in NICs would be felt in London and the South East, with an average annual gain of £316 and £290 respectively. Those in the North East, Yorkshire and the Humber, and Wales are likely to see the smallest benefit, with average gains of £192, £214, and £211 respectively.
However, whilst the top stand to gain the most from this Autumn Statement, overall, taking into account all policy decisions made over parliament as a whole (2019 to 2025), this parliament has been relatively progressive. This is largely due to the increase in people being drawn into paying more in income taxes and NICs through the freeze in thresholds on these taxes. The Resolution Foundation has found that taking all tax and benefit measures announced since 2019 together, the richest fifth have lost £1,100 a year, whilst the poorest 20% has gained £700.
This does not though mean that people are better off than they were in 2019. Real Household Disposable Income (RHDI) is still falling, quickly eroding living standards. The OBR forecasts that by the anticipated end of this parliament (Q1 2025), living standards as measured by RHDI, will be 3.5% lower in 2024-25 than their pre-pandemic 2019 level. The Resolution Foundation estimates that on average this means households will be £1,900 poorer at the end of this parliament than at the start.
The business rate relief scheme, which is a 75% discount on business rates up to £110k for retail, hospitality and leisure businesses, is to be extended for another year. This will be a relief for many small businesses within these sectors, which have been struggling on many fronts since the pandemic. They have faced reduced footfall since the pandemic (upon which many in these sectors are highly reliant); falling sales as households have lower disposable income; and rising input costs as energy, raw materials and wages have all increased. The extension of this scheme will, therefore, be a relief to many businesses, particularly given inflation is set to remain high through 2024 and energy bills are expected to increase in Q1 2024.
In the 2023 Spring Budget a temporary full expensing relief was introduced for main rate expenditure on plant and machinery for a period until 1 April 2026. This will now be made permanent in order to incentivise increased capital investment by companies. These measures will be welcomed by large manufacturers and other capital-intensive businesses. However, KPMG noted that despite the measure being described as a tax cut, it essentially provides an acceleration of the relief and so is an upfront cash tax saving rather than a permanent tax reduction.
No new funding was made available to public services in this Statement. Department settlements which once looked relatively generous when announced in 2021, have quickly been eroded by inflation and higher than expected wage deals. Day-to-day spending is now due to rise by only 1.9% per year in real terms between 2021/22 and 2024/25, compared to 3.6% when the settlements were first agreed. This will make it much harder for services to return to pre-pandemic performance levels, particularly given that the OBR has forecast for inflation to remain above the target 2% till 2025. The commitments already made therefore to the NHS, defence, foreign aid and childcare, implies there will likely be real terms cuts for unprotected areas of spending, with the OBR forecasting a 2.3% to 4.1% fall in day-to-day spending in real terms from 2025-26.
The key takeaways from this budget will be stickier than anticipated inflation, falling living standards, one of the highest national debts ever and one of the largest tax burdens. This will place the next government in a very difficult situation, potentially financially worse than the government that followed the global financial crisis in 2008/09.
In the last couple of years, households in the UK have seen one of the largest falls in living standards on record and this is going to have a resonating effect on households for many years to come, likely widening inequality. Businesses have seen rapidly changing policy which has created instability for investment, followed by extremely uncertain times during the pandemic and Brexit. The hope for many businesses going forward will be stability in government policy.
Of the policies that were announced in this statement, there was little substance. This was a slightly more conservative statement than the last few have been, with the ‘tax cuts’ and continued business support. However, with low growth forecast and high levels of debt there was little room for the government to make any substantial commitments. The government will likely be hoping to make more exciting commitments in the Spring Statement, as the last statement before the general election. However, given the OBR has highlighted that the government spent the majority of the pre-measures forecast improvement in this statement, it is likely the next statement will also be constricted and relatively sparse.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.