Autumn Statement 2022 - Our verdict
As expected, there was little good news coming from Jeremy Hunt’s autumn statement this morning. His delivery too was low-key and had little of the hubris we have become accustomed to from other recent incumbents of Number 11.
The statement itself combined significant tax rises with even larger cuts in spending. I think the measures have two broad aims, one firmly stated and one certainly more subtle.
The first clear objective is simply to start filling in the pothole in the road to balanced public finances left by his predecessors. The second implicit message is to reassure global markets that the adults are back in charge, after years of chaotic leadership in Numbers 10 & 11. This signal is especially important given the reaction to Kwarteng’s mini budget just a couple of months ago.
These are both sensible objectives in my view, but time will tell if they are achievable, and if the plans unveiled today are the right ones to get us there.
Looking at the tax measures in a bit more detail, perhaps the most significant one is the freezing of income tax thresholds until 2028, which is in fact a two-year extension to a freeze that had already been announced to 2026. This creates “fiscal drag” where tax allowances do not keep pace with increases in income. In the current wage inflationary environment, this will see more and more people brought into the higher bands of income tax and as a result paying more tax. This in turn means upwards pressure on wages may not automatically translate into more money in people’s pockets.
The most extreme example of fiscal drag is in inheritance tax, where the “nil rate band” (the value of an estate before tax is paid) has been frozen since 2009. Given the general rise in people’s wealth since then, this has meant more people have started to fall within the inheritance tax rules. Inheritance tax contributes only a tiny sliver to overall UK tax revenues, but the fact that this phenomenon is now relevant to income tax, which accounts for 40 or so per cent of total tax revenues, means the freezing of thresholds is likely to raise a very significant amount of tax. It’s impossible to divorce the budget from politics of course - this measure does not require an overall increase in tax rates, allowing Hunt to stick to the 2019 manifesto promise of not raising tax rates, while still increasing the tax burden.
Other notable measures include the reduction in the level at which people start to pay the additional income tax rate of 45 per cent from £150,000 to £125,140. This will not impact many people, but it contrasts strongly with Kwarteng’s original plan to abolish the 45 per cent rate entirely. This measure alone indicates most clearly the change in direction that Hunt is taking from his predecessor.
The increase in the national living wage will be welcomed by many, although let’s not forget that it comes at a cost to employers who actually fund the increase. Whether it hampers the ability of companies to create jobs remains to be seen.
Despite the reduction in the annual allowance for capital gains tax, the decision not to increase the headline CGT rate will be a relief to some. As with inheritance tax, CGT does not raise significant amounts of tax (around 4 per cent of total UK tax revenues), but there was some chatter before the statement about aligning CGT rates more closely with income tax rates. This could have acted as a disincentive to entrepreneurs and business owners. This is important because small and medium sized businesses are the biggest engine of economic growth and job creation and the fact that Hunt has chosen not to do this is to be welcomed.
One final measure, the increase in the corporation tax rate from 19 per cent to 25 per cent has already been confirmed and is expected to raise £18 billion additional tax annually. The actual rate payable is tapered, meaning only those companies with taxable profits of £250,000 or more will pay the full 25 per cent, which will provide some comfort for smaller businesses.
I think it’s fair to say that Hunt’s statement is a clean break with the recent past, and in particular Truss and Kwarteng’s tax cutting agenda. However, tax levels remain at their highest for 70 years, and will be higher again after today’s statement. This cannot be sustainable, but it’s difficult at the moment to see how Hunt can work his way out of this in the short term, given the economic headwinds we face.
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