LONDON — With a multibillion-pound tax giveaway, Chancellor Jeremy Hunt hailed his “Autumn Statement for growth” as a sign Britain has “turned a corner.”
The star turn was a 2-pence cut to the National Insurance tax paid by 27 million workers, rushed into effect in January. It shows a government in campaign mode, just in time for a general election that could come as early as spring 2024.
But not all is rosy for Hunt or PM Rishi Sunak.
As ever, the 114-page “green book” of measures — alongside more than 160 pages of analysis from the independent Office for Budget Responsibility (OBR) — contain several details buried or ignored in Hunt’s 51-minute speech to MPs. Here’s POLITICO’s spin-busting hot take.
1) Frozen tax thresholds dwarf the National Insurance cut
Wednesday’s National Insurance cut — billed as a crowd-pleasing drop in personal taxes for workers — is dwarfed by the impact of what’s known as “fiscal drag.”
That is, effectively, the impact of six years of freezes to the actual thresholds at which workers start paying tax in the first place.
Those freezes will haul £44.6 billion a year into the Treasury by 2028-2029, the OBR estimates. On the same measure, the Treasury says today’s National Insurance changes will save workers a collective £10 billion a year.
Treasury officials insist that — balancing all tax measures — workers earning the average salary of about £35,000 are still better off than they were in 2010 and again in 2019.
But the same guarantee has not been made for all workers, and no wonder.
The Institute for Fiscal Studies (IFS), a non-partisan think tank, says someone on £20,800 a year will gain £165 in 2024-2025 from today’s cut — but lose £413 from the frozen thresholds at the same time.
2) Tax burden to reach a new post-war high
“I said we would cut taxes when we could,” Hunt told Conservative MPs who have been desperate for good news. “I can deliver a package which does just that.”
Yes, today’s changes leave the “tax burden” 0.6 percentage points lower than it would otherwise have been in 2028-2029.
But never has context been so important. Fiscal drag (yep, that again) will still push taxes to a new post-war high of 37.7 percent of GDP in 2028-2029 — 4.5 points higher than before the COVID pandemic, and above the 36.9 percent Brits face now.
3) Spending eroded — but still higher than pre-COVID
The OBR projects there will be a “£19.1 billion erosion in the real value” of spending in government departments — helping shave government spending from 44.8 percent of GDP now to 42.7 percent of GDP in 2028-2029.
At risk is the government’s “long-term ambition” to raise defense spending from 2 percent to 2.5 percent of GDP, the OBR suggests. That target is a crucial part of Britain’s diplomacy on the world stage — but would add £16.1 billion to current spending estimates if implemented in 2028-2029.
Yet public spending is set to remain well above the 39.6 percent of GDP it comprised before the pandemic. And today’s statement raises spending (a little) rather than lowering it — as many Conservative MPs would like.
4) Inflation more persistent than hoped
After peaking above an eye-watering 11 percent in 2022, inflation is now projected to fall to 2.8 percent by the end of 2024 — and Hunt said his overall package leaves it lower than it would have been.
But has he broken his vow not to allow “any kind of tax cut that fuels inflation”?
Treasury officials could not say if the National Insurance cut — in isolation — leaves inflation higher than it would otherwise be.
The OBR also says inflation will be “more persistent and domestically-fueled than we previously thought,” returning to the Bank of England’s 2 percent target only in early 2025.
5) Growth for three years revised down since March
Hunt was buoyed by revised OBR forecasts, which have turned an expected 0.2 percent decline in GDP this year to 0.6 percent growth. A good thing, too — growing the economy was one of Sunak’s five pledges to the electorate in January.
But as widely expected, growth forecasts for 2024, 2025 and 2026 have all been downgraded since the last OBR projections in March.
Predicted GDP growth of 1.8 percent next year is now set to be just 0.7 percent; 2.5 percent in 2025 is now 1.4 percent; and 2.1 percent in 2026 is now 1.9 percent.
These forecasts are, however, cheerier than those given by the Bank of England, which recently projected zero growth in 2024, 0.4 percent in 2025 and 1.1 percent in 2026.
6) It all rests on a fuel duty rise that might not happen
The OBR forecasts assume Hunt will raise the fuel duty next year. Seriously, will he?
Not only has the fuel duty been frozen for 13 years, but it has also been cut by 5p a liter for two years. A powerful coalition of Conservative MPs and the Sun newspaper is likely to protest against its end.
Will the chancellor really raise tax on “white van man” months before an election? Or will he extend the cut for a third year, leaving himself to raise £6.2 billion a year by 2028-2029 from somewhere else?
The OBR says keeping fuel duty as it is would, at a stroke, wipe out 43 percent of the Chancellor’s “headroom” in 2028-2029.
More importantly, it says the national debt would no longer be falling — which is another of Sunak’s five pledges — in 2027-2028. Treasury officials say the chancellor would still meet his fiscal rules even without raising the fuel duty.
7) Flagship welfare reform gets only 10,000 people into work
Put together, all the “labour supply measures” announced today and in spring 2023, Hunt said, will get about 200,000 extra people into work across five years.
But on its own, the reform of the Work Capability Assessment for sick and disabled people is expected to add only 10,000 workers by 2028-2029.
The OBR says a far larger number of claimants — 342,000 — will be placed in lower-paying categories in the benefit system that require them to look for some work.
These changes apply to new claimants, not existing ones, avoiding a cliff-edge for many. But giving so many people less money than they would otherwise receive will surely anger welfare campaigners — while achieving little net change to the workforce.
The Treasury does, however, predict it will save £1.265 billion by 2028-2029.
8) Numbers on sickness benefit continue to rise
“Every year we sign off over 100,000 people onto benefits with no requirement to look for work because of sickness or disability,” Hunt said. “That waste of potential is wrong economically and wrong morally.”
Despite Hunt’s blizzard of reforms, however, the overall number of people on sickness and disability benefits is expected to keep rising.
The OBR projects the number of people on health-related benefits will rise by 600,000 — from 2.8 million now to 3.4 million in 2028-2029 — due to “worsening health trends and rising take-up.”
9) Net migration is predicted to surge
Thursday morning net migration figures will be a test of Sunak’s support from his immigration-skeptic back benchers — and the OBR has a sneak preview of trouble to come.
The watchdog projects that new migration to the U.K. will be 410,000 people in 2023-2024, considerably lower than last year but 115,000 more than it projected in March.
The OBR caveats its figures by saying future migration levels are “highly uncertain,” but says the number of visas granted by the Home Office continued to rise in early 2023.
