The Autumn Statement Overview 2022 | HK Wealth

On Friday September 23rd, Kwarteng presented his ‘fiscal event’ to the Commons. It marked a complete change of direction from the Treasury orthodoxy of previous Chancellors such as George Osborne, Philip Hammond and Sunak himself. Growth was prioritised, as Kwarteng unveiled the biggest tax cuts in half a century.

‘At last! A True Tory Budget,’ was the Mail’s headline. The right-wing think tanks were unanimous in their praise. But several papers and pundits described the moves as a gamble: ‘Truss’s great tax gamble,’ was the Times’ headline.

It was a gamble which didn’t pay off for the Chancellor and his boss. As Kwarteng finished his speech, the pound fell below $1.10 for the first time since 1985. As we wrote our report on the fiscal event for clients, the pound was trading at $1.08, having at one point touched $1.03. The Bank of England was forced to step in and the fate of the Chancellor and Prime Minister was effectively sealed. Kwarteng resigned on October 14th – to be replaced by Jeremy Hunt – and Truss followed ten days later. This time there was no leadership election: former Prime Minister Boris Johnson reportedly had enough backers among MPs but withdrew from the race, leaving Rishi Sunak as the only candidate.

A second fiscal event had been planned for Halloween – October 31st. Given the tax rises and spending cuts which had been widely trailed, that would have been a headline writer’s dream. In the event, the new Chancellor decided to push it back to November 17th and upgrade it to a full Autumn Statement. He was, he said, prepared to make “politically embarrassing” choices – and insisted that the delay to the Statement was the best course of action.

The political background

Jeremy Hunt, the new Chancellor, has been the MP for South West Surrey since 2005. He has held various ministerial posts, and was defeated by Boris Johnson in the leadership contest held to succeed Theresa May. When Johnson resigned this year, Hunt again entered the leadership race but was eliminated in the first ballot, subsequently endorsing Rishi Sunak.

It must have been a bitter pill for Liz Truss to appoint him as Chancellor. She was publicly humiliated as Hunt stood up in the Commons and – policy by policy – fed her ‘plan for growth’ into the parliamentary shredder.

Jeremy Hunt is the UK’s fourth Chancellor this year: in case anyone has lost count, we have also had three Prime Ministers. But that is that: it seems inconceivable that there will be a challenge to Sunak before the next General Election, which must be held no later than January 2025. You would assume – unless Sunak chooses to ‘freshen up’ his team before the election – that Jeremy Hunt will remain as Chancellor. He will certainly be presenting his first Budget in the spring of 2023.

So what were the pundits expecting from the Autumn Statement? ‘Tax rises and spending cuts’ was the simple answer. City AM’s headline on the morning of the Autumn Statement was stark: ‘The Taxman Cometh – Hunt to deliver toughest Budget in years today.’

Widely trailed were the confirmation of the increase in corporation tax and the freezing of the thresholds for inheritance tax and income tax. The amount of money that the Chancellor needed to raise was – depending on which paper you read – put at anywhere between £50bn and £70bn. City AM’s article put the figure at £60bn – suggesting that increases in council tax, an extension of the windfall tax on energy producers and increases to dividend tax rates and capital gains tax, could be on the way. Spending cuts were also forecast, in what several of the papers dubbed ‘a new age of austerity.’

The economic background

As we mentioned in the introduction, the pound slumped against the dollar following Kwasi Kwarteng’s speech. At the time of writing this section of our report, the pound was trading at $1.19: the FTSE 100 index of leading shares stood at 7,310. But there is clearly far more to the economic background than the pound and the stock market.

If one word defines 2022, that word may well be ‘inflation’. The day before the Autumn Statement, the Office for National Statistics (ONS) revealed that inflation had risen to 11.1% in October – a full percentage point higher than the previous month, and the highest figure recorded in 41 years.

Aside from the fact that we’re all paying more for our food and shivering in the cold, inflation also pushes up the cost of servicing the Government’s borrowing: in August, Sky News reported ONS figures showing that inflation had seen interest payments on Government debt ‘leap by 63% over the past year’.

Worryingly for the Chancellor, there was also news that the UK economy had contracted by 0.2% in the third quarter of the year. ‘Recession looms as the economy starts to shrink’ was the BBC News headline, with the Bank of England now forecasting a ‘very challenging’ two-year recession.

Add in the continuing war in Ukraine, tensions between the US and China and the slowdown in world trade – virtually all October’s economic indicators from China missed their targets and the port of Los Angeles has just had its quietest month since 2009 – and Jeremy Hunt faced a very challenging backdrop as he rose to speak.

How much would taxes go up? How would the markets react? Let’s look at all the measures he introduced…

The speech

Opening remarks

Jeremy Hunt began by acknowledging that many people are “worried about the future”, and although he insisted that “difficult decisions” had to be made, he said the Government would be “fair in our solutions” and “protect the vulnerable”.

Mr Hunt’s statement was accompanied by forecasts from the Office for Budget Responsibility (OBR), which predicts economic growth of 4.2% in 2022, but a contraction of 1.4% in 2023. Inflation, meanwhile, is tipped to be 9.1% this year and 7.4% next year.

Although the OBR now judges the UK to be in recession, Mr Hunt believes his plan will lead to a “shallower downturn”, and he cited stability, growth and public services as his three top priorities.

The Scottish Government intend to hold their own Budget on 15 December, and this will determine the rates which will apply to Scottish taxpayers.

Personal taxation and allowances

Business investment and taxation

The cost of living crisis

Other measures

Taxes on electric vehicles

Public spending

Adult social care investment

Universal Credit

Defence spending

International aid

Cutting carbon emissions

Funding for devolved administrations

English devolution

Nuclear power

Energy efficiency

Infrastructure spending

R&D investment

Conclusion and reactions

Reaction to the speech

In the opening to his speech, Jeremy Hunt described his priorities as “stability, growth and the public services”. He made a commitment to “rebuild our economy” and said that “to be British is to be compassionate”.

At the same time, much of the blame for the country’s ills was laid elsewhere. The OBR confirmed that ‘global factors’ lay behind inflation: it was a ‘made-in-Russia’ energy crisis.

Wherever you lay the blame, two things are undeniable: we will all be paying more tax, and there has been a huge shift in Government policy, in the space of just eight weeks. Depending on your source, from £30-45bn of tax cuts, to £50-60bn of tax increases. It was hard to escape the feeling that whatever Liz Truss and Kwasi Kwarteng had promised to abolish, Jeremy Hunt had decided to retain – and increase.

Even traditional Government supporters found it hard to summon up enthusiasm for the speech. One comment in the Express was particularly revealing: ‘The silence of Tory MPs could not have been more stark if Jeremy Hunt had been reading out the list of the dead after a terrible catastrophe. Instead, the Chancellor was delivering a list of tax rises that would hit their voters more than anybody else.’ The Mail’s headline was simple: ‘Tax and Axe.’

For Labour, Rachel Reeves was as critical of this speech as she had been of the last one. “The end of 2022,” she said. “Three Prime Ministers, four Chancellors and four Budgets later and we find ourselves in a worse place than we started the year. Britain is a great country with fantastic strengths but, because of Government mistakes, we are being held back.”

Outside Westminster, perhaps the most telling comment – and certainly the one that most people will experience – came from Paul Johnson of the Institute for Fiscal Studies. He pointed to what he termed ‘simply staggering numbers’ in the OBR report, tweeting: ‘Real household disposable income per person set to fall by 7% over the next two years. The biggest fall on record, taking incomes down to 2013 levels.’

What of the right-wing think tanks who greeted Kwarteng’s speech so warmly? ‘Unhappy’ is an understatement. Mark Littlewood of the Institute for Economic Affairs said: ‘The Chancellor has put the UK firmly on track for higher taxes, more spending and lower growth. This is a plan for managed decline, not a plan for prosperity.’ Several commentators made the point that entering a recession with the highest tax burden ‘for three-quarters of a century’ might deepen the economic downturn, and lead to lower tax revenues in the long run.

There was significant criticism of the speech from the hospitality sector – a major employer in the UK – with one company executive tweeting: ‘This industry is now in crisis and this has, bizarrely, not been recognised in the Autumn Statement.’

Staying with social media, the Living Wage Foundation tweeted: ‘It is welcome that the Autumn Statement included an increase to the Living Wage – but it still falls short of the real Living Wage.’

How did the markets react? Certainly not as dramatically as after Kwarteng’s speech, that’s for sure. At the time of writing, the pound is trading at $1.18 – down very slightly on earlier in the morning – while the FTSE 100 index is at 7,316, virtually unchanged on this morning’s level.

Conclusions

Kwasi Kwarteng didn’t waste time in his first – and only – major speech as Chancellor. He spoke for just 25 minutes. Jeremy Hunt, in contrast, spoke for very nearly an hour, delivering what was to all intents and purposes a Budget speech.

“We won’t apologise,” said Kwarteng – and neither will Jeremy Hunt. Nor will he change course in the near future.

The Budget speech is unlikely to be well received by traditional Conservative supporters. We have seen the comments of the Mail and Express above and, writing in the Telegraph, Allister Heath said, ‘There’s no point to the Tories if all they do is surrender to the left.’

Looking at higher taxes across the board, and with the Chancellor describing dividends as ‘unearned income’, you suspect that many business owners will agree with him. Jeremy Hunt’s plan for ‘stability, growth and public services’ may be the right one – only time will tell – but it is unlikely to lead to a sudden bounce in the opinion polls.

Whatever your views and your political opinions, though, there is one indisputable fact about the Autumn Statement. With thresholds frozen, far more people paying higher rate tax and allowances reduced, the need for first-class, long-term financial planning has never been greater.

In 1990, only 1.7m people paid higher rate tax: that figure has steadily risen to 5.5m in the current tax year. With allowances now frozen to 2028, that figure could well reach 8m. With the threshold for top rate tax cut to £125,000, the number paying tax at the top level could approach 1m. Proper planning of your pensions and ISAs, making use of all available tax allowances, making sure estates are managed effectively in light of inheritance tax – all of these are going to be crucial in creating wealth and preserving it for future generations.

As all our clients know, we are committed to working with you and your family over the long term. Today’s Autumn Statement has only increased that commitment.