Autumn Statement 2023 – Politics leading the policy?

Despite the widespread media speculation, none of the anticipated broader tax cuts materialised.  With no mention in the Statement of a reduction in the basic rate of taxation for individuals, an abolition (or reform) of UK IHT or any pre-emption of expected Labour amendments to the UK RND regime, the Statement seemed somewhat understated. It may be that the Chancellor is waiting for the Spring Budget or manifesto to make any of the headline grabbing changes in 2024, as it will be within a year of the next election. Or it may be that the government are testing the waters with smaller tax cuts before attempting any larger in order to keep to their growth and inflation targets. As it stands, IHT and the UK RND regime remain polarising policies politically and any amendments by the Conservatives would undoubtedly prompt immediate action by any potential future Labour government.

The Shadow Chancellor, Rachel Reeves, picked up on these omissions, reiterating Labour’s commitment to a “modern regime” to replace the UK RND regime. This demonstrates a slight adjustment to their stated policy of full abolition, but what form that “modern regime” will take remains to be seen.

In the report published today by the Office of Budget Responsibility (OBR) ¹ it is stated that interest rates are likely to stay higher for longer, and it now forecasts that the economy will grow more slowly in the medium-term than it forecast at the Spring Budget.

According to the OBR the tax burden of the nation is still set to rise to a post-war high. The largest contributor to this is the fiscal drag caused by the income tax brackets having been frozen in 2022, by the then Chancellor now Prime Minister. The hope will be that the measures outlined today and summarised below are able to promote the growth needed to meet their inflation and GDP targets as well as attract the on-the- fence voters in anticipation of the election forecast for next year. As Paul Johnson of the IFS said: “These tax cuts won’t be enough to prevent this from being the biggest tax-raising parliament in modern times.”²

Business

There were significant changes and tax freezes announced which, in particular, will benefit small business in the UK.

• The “full expensing” for Capital Allowances announced in the Spring Budget was confirmed to be permanent from 2026/27;
• The 75% relief for Business Rates for Retail, Hospitality and Leisure sectors was maintained for 2024/25, with a cash cap of £110,000;
• A freeze to the small business multiplier for Business Rates in 2024/25, whereas the standard rate multiplier will increase in line with CPI inflation.

Following consultation, the current R&D Expenditure Credit (RDEC) and SME schemes will be merged from April 2024 onwards. The Chancellor hopes that this will provide simplicity and provide greater support for UK companies to drive innovation. The rate at which loss-making companies are taxed within the merged scheme will be reduced from 25% to 19%. The intensity threshold in the R&D intensives scheme will also be reduced from 40% to 30% for accounting periods that start on or after 1 April 2024, allowing around 5,000 extra SMEs to qualify for an enhanced rate of relief. It is calculated that these changes should provide £280 million of additional relief per year by 2028-29.

National Insurance

It could be argued that some of the biggest tax cuts (to take effect from 6^th April 2024) contained in the Autumn Statement were provided to the self-employed via a combination of:

• an abolition to class 2 NI, a flat amount applied where profits are >£12,570 per annum of £3.45 a week, and
  
• a reduction in the 9% rate of class 4 NI to 8% which is levied on profits between £12,570 - £50,270 (dropping to 2% after £50,270 after).

This represents a potential saving of up to £556.40 per annum for the self-employed. (£179.40 for Class 2 and up to £377 for Class 4).

For employees a reduction in the Class 1 NI rate from 12% to 10% from 6^th January 2024 will net a saving of £754 per annum for individuals earning over £50,270.

Pensions

A call for evidence will be launch on a “lifetime provider” model which is aimed at simplifying the pensions market but allowing individuals to move towards having one pension pot for life. In addition, the government will legislate in the Autumn Finance Bill 2023 to remove the Pensions Lifetime Allowance (announced in the Spring Budget). The measure will clarify the taxation of lump sums and lump sum death benefits, and the application of protections, as well as the tax treatment for overseas pensions, transitional arrangements, and reporting requirements. This will take effect from 6^th April 2024.

The Pensions Triple Lock will be honoured, providing a rise in State Pension in April 2024 of 8.5%.

Announcements at a glance

• Income tax personal allowance remains frozen at its current rate until 6th April 2028;
  
• The dividend allowance will be further cut from £1,000 to £500 from 6^th April 2024;
• Rates of Capital Gains Tax remain unchanged;
• The Capital Gains Tax annual exemption will still be cut from £6,000 to £3,000 from 6^th April 2024;
• The Government will introduce legislation to the Autumn Finance Bill 2023 to extend the existing sunset clauses for the EIS and VCT scheme from 6th April 2025 to 6th April 2035, continuing the availability of income and capital gains tax reliefs;
• Multiple subscriptions will be allowed to the same type of ISA every year from 6th April 2024 (subject to the annual cap of £20,000 which will remain frozen);
• Partial transfers will be allowed in year between ISA providers form 6th April 2024;
• The government will legislate in the Autumn Finance Bill 2023 to remove the Pensions Lifetime Allowance. This will take effect from 6^th April 2024;
• Abolition of Class 2 National Insurance from 6^th April 2024;
• Reduction in Class 4 National Insurance from 9% to 8% from 6^th April 2024;
• Reduction in the main rate of class 1 employee National Insurance will be cut from 12% to 10% from 6^th April 2024.

Economic and market implications – walking the tightrope

Yesterday’s announcement from Chancellor Hunt was labelled as an “Autumn budget for growth”. Although the Conservatives highlighted their success in stabilizing the UK economy this year (as seen in this morning’s unexpected return to expansion in the PMI survey) while more than halving inflation, there was a clear focus on addressing deep structural reforms to boost growth over the medium term.

A number of the areas that we highlighted prior to the Budget were addressed by the government in an effort to help the UK economy escape the low-growth trap that it as been in since the Global Financial Crisis. Notably, the Chancellor highlighted key initiatives that would seek to boost business investment and drive productivity gains. A commitment to not only grow productivity in the public sector by 0.5% a year, but also to incentivize private investment for supply side reforms, was a key contributor to the OBR’s more optimistic outlook for the UK economy further out on the forecast horizon. Those policies will take time to have a material impact though, and like the Bank of England’s outlook, the OBR is forecasting below trend growth for 2024 and 2025.

It is also worth noting that the government has left themselves with around £13bn worth of additional fiscal headroom for further measures – a luxury that has been afforded thanks to higher tax receipts amid elevated wages and domestic inflation. We would expect to see that put to work in the Spring as a final push ahead of the General Election.

On the whole, yesterday’s announcement does little to impact our overall view on the UK economy though. The support from rising real incomes should begin to fade in the first half of 2024, and the lagged effects of monetary policy look set drag the economy lower. Ultimately, a recession looks like it might be necessary in the UK to bring inflation sustainably back to the 2% target. The timing of that is hard to pin down, and extent to which the UK economy can strongly rebound from a weak period will depend on the effectiveness of yesterday’s pro-growth initiatives.

The market reaction following the statement was fairly muted, at least in comparison to the big swings we have become accustomed to this year. UK Gilt yields pushed higher while the pound weakened slightly as investors expressed some concerns that additional government spending might reignite inflation and weigh on near-term growth. In our view, yesterday’s measures alone will not prompt the Bank of England to hike rates again, but we do think that they will reiterate their stance in pushing back on near-term rate cuts in favour of a “high for long” approach.

A potential recession will likely see the BoE moving towards their first rate cut around this time next year – a little later than what we have baked in for the Federal Reserve and European Central Bank. But with the UK economy on a clear cooling path and the market pricing policy rates to remain around 4% well into the future, we see value across the UK Gilt curve – particularly for the UK taxpayer. And while a slightly better fiscal position reduces tail risks for sterling weakness, a challenging growth-inflation mix in the UK makes it hard to see a path to sustained strength from here. It might make sense to diversify some GBP exposure on the recent rally.

In conclusion, this was an Autumn Statement which promised growth and tax cuts. With the tax cuts modest at best, the near-term impacts on growth and inflation look to be minimal. However, what could the latest set of policies mean for the longer-term outlook for the UK economy?

it is widely accepted that there will be an election within the year (with a hard deadline of January 2025). Realistically there is one further instance where any real changes can be brought in by this Conservative Government, the Spring Budget. With this Statement being billed as the Budget for Growth, will the Budget for Change emerge in the Spring?

¹ https://obr.uk/docs/dlm_uploads/E03004355_November-Economic-and-Fiscal-Outlook_Web-Accessible.pdf
² https://www.theguardian.com/uk-news/2023/nov/22/chancellors-tax-cut-opens-door-to-early-election-and-sets-a-trap-for-labour?CMP=Share_iOSApp_Other
³ https://assets.publishing.service.gov.uk/media/655df827544aea000dfb3277/E02982473_Autumn_Statement_Nov_23_Accessible_v2.pdf