Autumn Statement 2022 Response From The Institute For Fiscal Studies

17th November 2022

Paul Johnson, Director of the IFS, said:

‘Jeremy Hunt's first fiscal event as Chancellor was a sombre affair. Surging global energy prices have made the UK a poorer country. The result is an OBR forecast that the next two years will see the biggest fall in household incomes in generations.

The swing over a couple of months from Kwasi Kwarteng's fiscal loosening to a big fiscal tightening is a belated recognition of some harsh fiscal realities. The sharp and sustained increase in how much we now expect to spend on debt interest, in particular, has forced difficult decisions elsewhere. At around £100 billion a year by the end of the forecast period, spending on debt interest will be higher than spending on any single public service bar the NHS.

The Chancellor has felt obliged to relax his fiscal mandate. He is no longer looking to balance the current budget at all, and has pushed out to five years the point at which he says he wants debt to be falling as a fraction of national income. Even so, he has had to announce a package of tax rises and spending cuts amounting to around £50 billion (about 2% of GDP) to meet his new mandate. And even with that, we're still set to be borrowing 2.4% of GDP, or £69 billion, at the end of the forecast. A return to Osborne-era targets of an overall budget surplus, this is not.

The fiscal tightening is heavily back-loaded, with the vast bulk spending cuts in particular pencilled in for after April 2025. Given the profound uncertainty around the outlook, and the potential economic and social costs of an unnecessarily large up-front fiscal tightening, this is probably the right choice, on balance. But delaying all of the difficult decisions until after the next general election does cast doubt on the credibility of these plans. The tight spending plans post-2025, in particular, may stretch credulity.

The Chancellor will be hoping that his clear commitment to fiscal responsibility and the independence of the Bank of England, his full involvement of the Office for Budget Responsibility, and his less pugilistic approach to economic policy-making will be enough to restore the UK’s tattered international reputation. Let’s hope so.’

Public finances
As expected, the new Chancellor had to contend with a much worse economic and fiscal outlook than forecast back in March. For 2025-26, weak growth and high inflation led to receipts being revised down by £25 billion and spending on benefits and state pensions being revised up by £14 billion. Even more strikingly, the upwards revision to the Office for Budget Responsibility’s assumed parth for interest rates led to forecast spending on debt interest in that year being doubled from £47 billion to £95 billion. On top of this, policy announcements since March - in particular the decision not to introduce the health and social care levy - added around another £16 billion to borrowing in that year. Overall, before incorporating the measures from today’s Autumn Statement, the increase in borrowing amounted to around £90 billion in 2026-27. A lot has certainly changed since March.

So how did the new Chancellor respond? His response, perhaps sensibly, was largely one of wait and see. The net effect of measures announced in the Autumn Statement is to reduce borrowing in 2024-25 by just £11 billion. So not much new fiscal tightening in this parliament. After that, tax rises and, in particular, reductions in the numbers pencilled in for public services build up. But even in 2026-27 the total impact of new Autumn Statement measures is to reduce borrowing by ‘only’ £42 billion. This still leaves borrowing in that year being forecast to be £80 billion, compared to the £32 billion forecast in March.

The size of the fiscal tightening increases further in 2027-28, with the overall impact of new measures reaching £54 billion, driven by the squeeze on public service spending growing over the period from April 2025. But this still leaves borrowing at £69 billion in 2027-28. This is sufficient for the government to be on course for underlying debt to be falling as a share of national income. But only just. It now has headroom of just £9 billion compared to the £34 billion it had back in March and this is despite the target year for debt to be falling being pushed back two years. And even then the Government is on course to be still running a current budget deficit, contrary to the commitment made alongside its 2019 general election manifesto.

As ever, the forecasts are uncertain. The government’s finances could end up much healthier than expected. But if the outlook deteriorates further then Jeremy Hunt really has not left himself with much room to manoeuvre.

Living standards
Living standards growth since 2008 has been extremely weak by historical standards. Unsurprisingly given the cost of living crisis, today’s Office for Budget Responsibility forecast suggests that this is going from bad to worse. This year we are set to see the largest fall in real household disposable income per head (4.3%) since the late 1940s; next year, we are set to see the second-largest fall (2.8%). Modest growth is expected to return after that, but even by 2027-28 we are not expected to have had a single year of growth higher than the pre-2008 average since 2015-16. Average household income per head is due to be the same in 2027-28 as it was in 2018-19, and 31% below where it would have been if the pre-2008 trend had continued.

The Chancellor also announced that the additional-rate threshold - at which 45% income tax becomes due - will be lowered from £150,000 to £125,140 (the point at which a taxpayer loses their personal allowance) from April 2023. This will increase the number of additional-rate taxpayers by about 350,000, bringing the total to approximately 1 million - up from 236,000 when the additional rate was first introduced in 2010-11.

The chart below summarises the combined impact, in 2027-28, of all the income tax and NICs measures implemented since 2021-22. Anyone with a taxable income of about £9,000 or more is set to see their take-home pay fall because of these changes, with most higher-rate taxpayers seeing a fall of £1,700 per year. Losses rise to £1,815 per year for those on £150,000 or more, due to the reduction in the additional-rate threshold.

Note
To read more go to -
https://ifs.org.uk/articles/autumn-statement-2022-response