Financial Pain Today But Chancellor Put Off Much More Pain Until after the next General Election

20th November 2022

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.

Personal taxes
The government is leaning about as heavily as it could on freezing tax thresholds to raise revenue.

All the main income tax and employee National Insurance thresholds were already set to be frozen between now and April 2026, and the Chancellor's Statement extended this by a further two years to April 2028. Further freezes to inheritance tax and VAT registration thresholds have also been added.

The Statement also extended the freeze to the employer NICs threshold. While in the immediate term this will have relatively little impact on employees, in time it will affect them similarly to an increase in employee NICs, since taxing employers on the salaries they pay will reduce the salaries they are willing to pay.

Freezing the employer NICs threshold means that the government has now announced multi-year freezes to every major income tax or National Insurance threshold that was not already frozen by default.

As ever, using freezes to raise revenue can be politically easier than other options and it does have the advantage of avoiding sharp overnight reductions in income, but it also comes with significant downsides, especially when implemented over several years. The real-terms impacts are highly uncertain because they depend on unknown future rates of inflation. The past few months illustrate this starkly. Inflation expectations have fallen, meaning that the freezes already announced are now expected to raise less than previously thought.

Nonetheless, together the freezes to income tax and NICs thresholds from April onwards will raise around £30 billion per year when finished (excluding freezes to thresholds that were already frozen by default).

The freezes to income tax thresholds also mean that more people will be brought into tax or see their marginal tax rate increase. By 2027-28 the total number of income taxpayers is set to rise from 34 million to 35.6 million (63% and 66% of the adult population respectively). The number of higher- or additional-rate taxpayers is set to rise from 6.1 million to 7.8 million (11% and 15% of the adult population respectively). As can be seen in the figure below, this represents the biggest proportion of adults paying higher-rate tax since the beginning of the individual income tax system in 1990-91.

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.

Source
IFS report https://ifs.org.uk/articles/autumn-statement-2022-response