Alice Pugh provides an overview of the key announcements to come out of the Autumn Statement. For futher analysis see: The Autumn Statement - The Impact on the West Midlands
The Autumn Statement was finally released last week detailing government tax and spending plans. The budget comes at a time of significant political and economic turbulence. The government has significant challenges that it will need to tackle if it wants to encourage growth and levelling up. Significant challenges facing the government include:
- Rapidly rising inflation: Inflation has risen to 11.1% in the 12 months up to October. This is the highest rate of inflation since the 1970s. Whilst, the largest contributor to the higher rate of inflation is large energy price increases, food and beverages inflation was 16.4% since the same time last October.
- Energy Prices: Energy prices are set to continue to rise with City REDI forecasts showing that energy prices could rise as high as £6,600 in April 2023 without a price cap for households. City REDI also forecasts that for a small business energy prices will be between £11,650 and £20,077 from April 2023, based on average gas and electricity usage.
- Tight Labour Market: Job vacancies and unemployment are at a ratio of 1:1. This means that for every unemployed person there is one vacancy. Simply put, there is a labour shortage in the UK. The shortage largely comes from significant numbers of people leaving the workforce to become economically inactive. A significant cause of this is people retiring after the pandemic and an upturn in people with long-term health conditions forcing them to leave the workforce. Between 2019 and 2022, the number of people who became economically inactive due to long-term sickness rose from 2 million people to 2.5 million.
- High interest rates: Interest rates are at their highest since before the financial crash, at 3%. Whilst historically this isn’t a very high interest rate, banks, businesses, people and investors, have become used to low interest rates around which it was easy to borrow money. The government has also been used to the same and now it has become expensive for them to borrow money, eating into potential budgetary spending.
The OBR, in its forecasts, also highlighted the challenges that the government will be facing over the next few years:
- Recession– As of the third quarter of 2022 the economy has entered a recession, that the OBR forecasts to last for a year, with an expected 2% fall in GDP
- Living standards– Inflation is set to erode real wages and reduce living standards by 7% by the 2023 financial year, wiping out the last 8 years of growth.
- Unemployment– This is set to rise from 3.5% to 4.9% by 2024
- The Deficit– Is set to rise from £133.3bn (5.7% of GDP) last year, to £177.0bn (7.1£ f GDP) this year. However, borrowing will then fall to £140bn (5.5% of GDP), as a result of tax rises and scaled-back support, continuing to fall to £69.2bn (2.4% of GDP) in 2017/28.
- Public Spending– Despite expected departmental cuts from 2024, total public spending rise from 39.3% of GDP to 43.4%in 2017/28. This is 2.9% higher than forecast in March, reflecting higher debt interest rates and welfare spending raising cash spending.
- Government Debt– higher borrowing is set to push underlying debt from 84.3% of GDP to 97.6% in 2025. With the share of revenues consumed by servicing the debt rising from under 5% in 2019/20 to 8.55 in 2017/28, meaning public finances will be more vulnerable to future shocks or swings in market sentiment.
- Spending cuts will be delayed by 2 years, but are expected to total £30bn. From the 2024 financial year, day-to-day departmental spending for unprotected departments will rise by 1% per year for three years, this will be a significant cut for some departments.
- The NHS budget is to increase by £3.3bn each year for the next 2 years.
- Schools will get an extra £2.3bn in funding each year for the next 2 years.
- A task force has been announced, which will focus on an initiative to insulate homes and upgrade boilers, with an extra £6bn in funding from 2025 to 2028
- The defence budget will remain at 2% of GDP.
- £280m to be invested in the DWP to crack down on benefit fraud and errors over the next 2 years
- Overseas Aid will remain at 0.5% of GDP and will not return to 0.7% “until the fiscal situation allows”
- The Chancellor will continue with the second round of the levelling up fund, at least matching the £1.7bn value of the first round.
- The top 45% rate of tax will now be paid on earnings over £125,140, instead of £150,000.
- Income tax personal allowance and higher rate thresholds are frozen for a further two years, until April 2028.
- Main National Insurance and inheritance tax thresholds will also remain frozen for a further two years, until April 2028.
- Local councils in England will be able to raise council tax up to 5% a year without a local vote, instead of 3% currently.
- A £13.6bn package of property tax support for companies, plus scrapping a potential online sales tax.
- This will include freezing the business rates multiplier for another year to protect businesses from rising inflation, meaning that rates will no longer be hiked in line with inflation from next April.
- There will also be increased rates of relief for retail, hospitality and leisure firms from 50% to 75% from 2023 to 2024. With the relief being capped at £110,000 per business.
- The revaluation of business rates will come into effect from April 2023.
- Electric Vehicles will no longer be exempt from Vehicle Excise Duty from April 2025. Company tax rates will remain lower for electric vehicles and increases will be limited to 1% per year till 2025.
- The cap on the increase in social rents in England at a maximum of 7% in 2023-24.
- The dividend allowance will be cut from £2,000 to £1,000 next year and then to £500 from April 2024.
- The annual exempt amount for capital gains tax will be cut from £12,300 to £6,000 next year, then £3,000 from April 2024
- R&D tax relief for SMEs deduction rate cut to 86% and the credit rate of 10%, but there will be an increase in the rate of the separate R&D expenditure credit from 13% to 20%
- Employers’ National Insurance Contributions (NICs) will be frozen until April 2028, with Employment allowance maintained at its new higher level of £5,000.
- VAT registration will remain at its current level till March 2026.
- The Chancellor will implement reforms related to an international tax deal agreed upon with OECD countries, which will come into effect in 2024.
- The planned increase in corporation tax to 25% for businesses earning over £250,000 from April 2023.
Benefits and Wages
- The national living wage will rise to £10.42 from £9.50 for people over the age of 23 from April 2023.
- State Pension, means-test and disability benefits will increase in line with inflation by 10.1%.
- The government’s review on changing the state pension age will be published next year.
- The lifetime cap for care home costs will now be delayed 2 years, providing councils with greater funding flexibilities of £2.8bn net year and £4.7bn the year after. However, this is simply delaying a cost not giving local authorities more money.
- The household energy price cap will be extended for one year from April 2023; however, the cap will increase to £3,000 per year instead of £2,500
- Households on means-tested benefits will receive £900 support payments next year.
- Pensioners will also receive a payment of £300, with individuals on disability benefits receiving an additional £150.
- Windfall tax on profits of oil and gas companies will increase from 25% to 35%, extending until March 2028.
- New temporary 45% tax on companies that generate electricity, is to come into place in January.
- The investment zones are set to be refocused to catalyse a limited number of high-potential clusters, working with local stakeholders, set to be announced in the coming months. Therefore, existing expressions of interest have been scrapped. Instead investment zones will be centred around universities in “left-behind” areas, to build growth clusters, with further announcements being made in the Spring Budget.
Trailblazer Devolution deals
- The government has restated its commitment to agree on trailblazer devolution deals with Greater Manchester and the West Midlands, seeing more devolved powers in areas including skills, transport and housing.
- HS2 to Manchester, Northern Powerhouse Rail and East West Rail will go ahead as planned.
- Sizewell C nuclear Power plant will go ahead as planned.
- The gigabit broadband rollout will continue.
The announcements made in this budget are significant, it is a massive budget, with tax burdens rising even higher to levels not seen since after the second world war. The budget is front-loaded with spending on extensive support schemes; however, it is back-loaded with cuts from 2025. Notably just in time for the 2025 general election. The tax and benefit changes are far more progressive than the changes within the ‘mini budget’, with higher earners taking on a greater tax burden than had been expected. However, what is clear is that this budget is a sombre affair, and we will be continuing towards a second round of austerity from 2025.
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI or the University of Birmingham.