Our Response to the Autumn Statement

UK Policy

Our Response to the Autumn Statement

Commentary
Posted on: 17th November 2022
By Multiple Authors
Ian Mulheirn
Executive Director for UK Policy and Chief Economist
James Browne
Head of Work, Income and Inequality Analysis
Daniel Newport
Head of Net Zero - UK Policy
Jeegar Kakkad
Head of Productivity and Innovation

    Overview: Short-term realism, medium-term fiction?

    Overview: Short-term realism, medium-term fiction?

    The Chancellor combined a bare-minimum set of measures for the next two years with some undeliverable public-spending proposals for the next parliament to deal with

    Ian Mulheirn Executive Director, UK Policy

    The Chancellor had to weave a path through three challenges in the Autumn Statement. First he needed to restore fiscal credibility after a calamitous few months of macroeconomic mismanagement, putting the public finances back on track in the wake of a significant growth downgrade and rising interest bill. His second task was to do that without sucking demand out of the economy just as we head into a grim recession. And third, he needed a plan to get households, businesses and public services through still-eyewatering energy bills next year.

    In large part he aimed to achieve these things by combining a bare-minimum set of measures for the next two years with some undeliverable public-spending proposals for the next parliament to deal with. In terms of the fiscal stance, a small net giveaway in 202324 at least avoids exacerbating the downturn next year, turning into a small net take-away in 202425. However, a much stingier Energy Price Guarantee will be politically difficult to deliver as well as hitting the economy in April, when the economy is near its weakest.

    From 2025 onwards deep public-spending cuts start to bite, reaching £36 billion by 202728. While it’s true this will mean departmental budgets grow by 1 per cent in real terms after 2025, given that health and defence will likely get more generous settlements, this envelope implies incredibly tight – and almost certainly fictional  spending settlements across most other public services. The economic outlook may well improve, but if it doesn’t more taxes are probably on the way.

    Critical to the Chancellor’s ability to balance competing objectives was a significant loosening of the fiscal rules, giving the government time to get the public finances in order. Rather than Rishi Sunak’s target for having debt falling and the current budget balanced in the third year of the forecast, Hunt has loosened things to beat a 3 per cent overall deficit by 202728 alongside getting debt falling. That gives much-needed breathing space for the economic recovery to take hold, the pressing immediate concern. But it's worrying that the distinction in the fiscal framework between current and capital spending has been removed, opening the way for future Chancellors to bear down further on investment at the expense of day-to-day consumption.

    The growth forecast produced by the OBR was grim, showing household incomes falling at an unprecedented pace for two years in a row – the biggest and fastest fall in living standards on record. The political fallout from such a shock is surely unpredictable. But for an economy facing surging inactivity and higher energy prices, the medium-term story was significantly better than it might have been, in large part because the OBR substantially revised its projections for immigration, pushing up annual net migration by almost 60 per cent compared to its last forecast, some 205,000 per year. Whether that’s a story the Home Office will want to put up in lights remains to be seen.

    A more targeted form of energy bill support after all?

    A more targeted form of energy bill support after all?

    Household energy bill support is set to become more targeted on the poorest come April, but all households are still set to see a significant drop in their incomes. Additional support for households next year would support the economy through the forthcoming recession without breaching any fiscal rules

    James Browne Head of Work, Income and Inequality

    The idea of a new “targeted” system of energy bill support by April was always wide of the mark. So it is not surprising that the Chancellor has decided to stick with a similar support structure to this year that is less generous overall, but also more targeted towards the poorest.

    The prices households will pay under the Energy Price Guarantee will increase, leaving an average household with a bill of £3,000 next year. This will leave millions of households exposed to prices they can’t afford, for the sake of a £14 billion saving at a point where the economy is at its weakest.

    Alongside the reduction in the generosity of universal energy bill support, the Chancellor decided to repeat the cost-of-living payments that have helped pensioner households and those on benefits this year. Both these and the £400 universal support through energy bills were set to expire in April. This would have hit households hard, particularly the poorest. Although benefits are set to rise by 10.1 per cent, in line with inflation, (confirmed by the Chancellor today) this would not have been enough to offset the removal of these payments and increases in the cost of living between now and then. Before today’s announcements, poorer households were set to be around £60 a month worse off (equivalent to more than £700 a year) next April compared to today.

    Families on means-tested benefits will now receive another £900 over the course of 202324, pensioner households £300 and those on disability benefits £150. This will substantially ease the burden on poorer households, more than compensating for higher energy costs from the increased energy price cap. But those who do not receive these benefits  middle- and higher-income households and those who do not claim the support to which they are entitled  will be worse off as a result of today’s changes, both in terms of higher energy bills and through today’s rises in council tax. This spreads the pain come April much more evenly – the average real income reduction is close to 2 per cent for all income deciles.

    Figure: Pain set to be spread more evenly in April

    Note: Figure compares net household incomes in Q4 2022 and Q2 2023 with and without the changes announced in the Autumn Statement. Income decile groups created based on income net of direct taxes and benefits and adjusted for family size using the modified OECD equivalence scale.

    Source: TBI calculations using Oxford Economics inflation forecasts and UKMOD version 3.5 run on 201920 Family Resources Survey data. UKMOD is maintained, developed and managed by the Centre for Microsimulation and Policy Analysis (CeMPA) at the University of Essex. UKMOD benefited from financial support by the Nuffield Foundation (20182021). The results and their interpretation are the sole responsibility of TBI.

    Overall, the reduced generosity of support from April onwards will reduce consumer spending and weaken the economy further next year. Additional support for households in the short term could have lessened the pain without affecting the longer-term sustainability of the public finances or breaking any fiscal rules.

    The government may point to what it is doing elsewhere to bring down bills. An Energy Efficiency Taskforce is a welcome step, but with further funding not kicking in until 2025, it is still not clear what will actually help households and businesses respond to the crisis. Similarly the commitment to Sizewell C Nuclear plant is big news for the energy industry but is highly unlikely to be delivering power for consumers this decade.

    VED in the water?

    VED in the water?

    With £9 billion of annual tax revenue at stake by the end of next parliament, some taxation of electric vehicles was inevitable. But, with the social cost of congestion likely to rise from £59.4 billion to £121.5 billion per year by 2040, taxing cars rather than driving means Vehicle Excise Duty is the wrong tax for the job

    Daniel Newport Head of Net Zero

    The introduction of Vehicle Excise Duty (VED) on electric vehicles may feel inevitable. The loss of taxation as drivers switch away from petrol and diesel cars is unsustainable. In our paper Gridlock Britain we estimated that by the end of next parliament it might cost £9 billion a year in lost revenues, rising to £30 billion a year by 2040.

    But, while quick and easy to implement, and unlikely to ultimately put off drivers from making the switch, VED is the wrong tax for the job.

    First, because it is small beer compared to the revenue lost from fuel duty.  Second, because, as the marginal cost of driving plummets, we calculated that the social cost of congestion could rise from £59.4 billion to £121.5 billion per year by 2040.

    If we’re going to tax electric vehicles we need to do it in a way that addresses this externality and boosts productivity. Road pricing may be a tougher political sell but is an increasingly urgent fiscal necessity. In that context, using limited political capital, and eating into switching incentives by introducing VED may prove a misstep.

    R&D Budget

    R&D Budget

    9.1 per cent cut to R&D budget is, as the Chancellor said, "a profound mistake"

    Jeegar Kakkad Head of Productivity and Innovation

    In his Autumn Statement speech, the Chancellor said that “cutting capital limits our future” and subsequently announced a 9.1 per cent cut to government R&D spending in 2026/27.

    The Spending Review 2021 set the R&D budget at £20 billion in 2024/25 and set an ambition of £22 billion in 2026/27. Yet today’s Autumn Statement announced R&D funding would be frozen in cash terms at £20 billion from 2024/25, implying a 9.1 per cent cut to the government’s ambition for the R&D budget in 2026/27.

    While the rise in the Research & Development Expenditure Credit (RDEC) from 13 per cent to 20 per cent is a welcome step towards making our tax incentives for R&D globally competitive, the cut to long-term R&D budget is, as the Chancellor said in his speech, “a profound mistake” that will limit our future.

    9.1 per cent cut to public R&D budget (£bn)

    Find out more
    institute.global