A U-Turn to Austerity: A Reality Check On The Chancellor’s Autumn Statement

The Chancellor struck an optimistic tone on Wednesday as he stood up to address the Commons with his Autumn Statement, proudly stating the country ‘has turned a corner’ and that his plan for the British economy is ‘working’. Sadly, as we heard at our immediate reaction event that evening with Steve Reed MP, NEF economist and PPC Jeevun Sandher and Politico Playbook Deputy Editor Eleni Courea, even basic interrogation reveals how half-baked, opportunistic and miscalculated the Autumn Statement was. If we are ‘turning a corner’ it’s a U-turn, back to the 2010’s, back to austerity, only this time public services are already on their knees.

 

Tax Cuts? What A Drag…   

The Chancellor was all too proud to announce the “largest business tax cut in modern British history” by making permanent the temporary tax relief for ‘full expensing’ which allows businesses to claim 25% of the cost of their investment in certain machinery back against their tax liability. This was supplemented by extending business rate relief for sectors that have struggled since the pandemic, such as hospitality and leisure. Full expensing is forecast to cost around £3 billion a year in the long run and in itself is hardly a perfect reform even in principle. The tax relief can only be realised when businesses invest in plant and machinery encouraging businesses to neglect other forms of investment, and it provides a big subsidy for debt-financed investment.

Economists and experts have generally welcomed the pro-business moves, but it is personal taxation the newspapers (and voters) care about most, and it’s there that the Chancellor attempted to pull a fast one. He did cut National Insurance by two percentage points, from 12% to 10%.

Yet the tax burden is set to reach 37.7% of GDP, the highest since the Second World War. So how can the biggest tax cuts for three decades result in the highest level of taxation for nearly a century?

The answer is another issue which the government wants to claim it has solved, or at least has gotten under control. Inflation.

Inflation has driven up wages and increased the quantity of money in the economy (if not the value of that money). But the Chancellor has chosen to freeze both income and national insurance tax bands resulting in fiscal drag. More money, but the same bands, means over 3 million people will be paying tax who weren’t before. The freeze on income and national insurance tax bands are forecast to generate £51 billion a year for the treasury by 2027/28.

 

More Money For Public Services?   

So it’s a tax cut, but not one you will feel. Oh well, at least the Chancellor has raised money for our ailing public services? Sadly not.

Firstly, extra revenue raised by the fiscal drag is almost entirely spent on the tax cuts. Then factor in that debt interest spending, a legacy of the Truss-Kwarteng era, which is now over 4% of GDP with forecasts continually being revised upwards.

But the real nightmare for your public services comes from the decision by the Chancellor not to raise departmental spending in line with inflation. Just as the money in people’s pay packets has gone up in quantity (if not purchasing power) so has what the government has to pay to fund their services. The Office for Budget Responsibility (the independent body which analyses the government’s fiscal plans) estimates that the real value of departmental budgets will have dropped by £19 billion by 2027/28.

This leaves many key services looking at further painful cuts, at a scale that experts have said is comparable with the austerity we experienced the last time David Cameron was in the government. The difference is those public services were well funded under Labour before they met Cameron and Osborne’s axe. Today, things are quite different. NHS integrated care systems (ICSs) are already struggling to balance their budgets in 2023/24 and at a local government level we have seen a record number of authorities issuing section 114 (bankruptcy) notices. Analysis by the Institute for Government paints a disturbing picture for Policing and Justice in particular. Once increased demand is taken into account, prisons look set to see a real-term spending cut of 6.7% and the court’s real-term spending cuts of 5.6%.

With budgets not increasing the Chancellor has indicated that he intends to realise improved public sector performance through higher productivity, targeting 0.5% growth a year. While this might seem arbitrary and heroic perhaps there is something in Rishi Sunak’s faith in A.I to sort everything out. Or there would be, had the Chancellor not also confirmed that capital budgets would fall in real terms. It’ll be hard for a doctor to embrace the AI productivity gains while working in a crumbling hospital wing on a computer which struggles to turn on.

 

Leave It Better Than You Found It 

As is always the case with a fiscal event, the real story doesn’t come out until after the Chancellor has sat down. This year, rather than having to wait for the thinktanks to discover all the hidden stings in the Chancellor’s tale, the drama began almost immediately with the release of the OBR’s forecasts.

They are predicting the biggest drop in living standards in a generation, with British households facing their biggest annual drop in disposable income since 1955. This is clearly exacerbated by the rising tax burden and when people look to their public services, they will find them cut to the bone.

As if to ram home the significance of this forecast, the energy price cap was revised up the day after the statement, adding £94 a month more to household bills on average from January. Citizens Advice also reported that they are already helping record numbers of people approaching the service for help with energy-related debt. At our event, Steve Reed MP described his takeaways from the Autumn Statement as “Low growth, stagnant wages, a big disappointment”. Disappointment is right but that does not cover the anger we should feel at this government for presiding over one lost decade and attempting to engineer another.