Jeremy Hunt’s March Budget was an exercise in Big State Toryism. It lacked meaningful tax cuts, was full of new spending promises, and was estimated by the Office for Budget Responsibility (OBR) to take the ratio of public spending to GDP to ‘43.4 per cent, its highest sustained level since the 1970s’. But today’s Autumn Statement, the Chancellor told the Commons today, was going to be different. Framing the fiscal update as an ‘Autumn Statement for Growth’, Hunt began his announcement by insisting that ‘our choice is not big government, high spending and high tax because we know that leads to less growth, not more. Instead we reduce debt, cut taxes and reward work’.
What followed was a series of concrete tax cuts for both businesses and workers. Hunt was working with a £27 billion fiscal windfall calculated by the OBR – more than four times the amount he previously thought he’d be working with. He spent nearly all of it on a combination of tax cuts and business relief. The biggest announcements included his decision to make ‘full expensing’ – which allows businesses to write off their investments against their tax bills – permanent. It was hailed as the ‘largest business tax cut in modern British history’, amounting to £9 billion, which plummets the UK to the ‘the lowest headline corporation tax rate in the G7’ – a point that this government will want to emphasise, as Rishi Sunak’s decision to hike corporation tax from 19 per cent to 25 per cent for the largest businesses (and Hunt’s decision to keep it there) remains a huge point of contention within the party.
The tax burden is set to rise to a post-war high by 2027-28
But the surprise announcement was on National Insurance (NI), which has been cut by two percentage points for workers and simplified for the self-employed: ‘abolishing the compulsory Class 2 charge and cutting Class 4 National Insurance’. The reduction from 12 per cent to 10 per cent for employees is estimated to put £450 back in the pockets of your ‘average’ worker, a tax cut costing £8 billion a year.
The decision to target the tax on jobs – combined with welfare reforms, which will further restrict benefits if people are refusing to look for work – suggest the Tories are trying to develop a more cohesive narrative around their plans for next year (and indeed the next five, when they inevitably ask voters to give them a fifth turn in office).
‘If we want people to get up early in the morning,’ said Hunt, ‘if we want people to work nights, if we want an economy where people go the extra mile and work hard then we need to recognise that their hard work benefits all of us.’ In other words: the more we work, the more the economy grows. And the more it grows, the better off we all can be.
But was this really the ‘Autumn Statement for Growth’? While the tax cuts were heavily focused on encouraging investment and work (the OBR estimates that all measures taken together will add 200,000 jobs to the UK economy by the end of the forecast period), the GDP figures tell a different story.
Hunt may be selling his fiscal update as one that will dramatically boost growth estimates, but the OBR has actually revised down its forecasts for the next few years. While the OBR is now predicting tiny growth this year (compared to its prediction of a small recession back in March), it has revised its forecasts downward for the next three years: from 1.8 per cent to 0.7 per cent in 2024, from 2.5 per cent to 1.4 per cent in 2025, and from 2.1 per cent to 1.9 per cent in 2026.
What continues to weigh down the economy? A myriad of things, many of which were again plastered up, or glossed over completely, in today’s Statement. While NI may be coming down for workers, millions have been pulled into a higher tax bracket over the past few years due to Sunak’s decision to freeze personal tax thresholds. Fiscal drag is set to slow, yet today’s update from the OBR estimates the freeze means by 2028-29 ‘nearly 4 million additional workers paying income tax, 3 million more moved to the higher rate and 400,000 more paying the additional rate.’
The Chancellor may be able to boast about cutting tax now, but he is not going to want to talk much about the overall tax burden which is still set to rise to a post-war high by 2027-28. In fact, the November forecast is now higher than the revised March forecast (which takes into account newer GDP figures), estimated that the tax to GDP ratio hits a staggering 37.7 per cent, rather than 37 percent.
Yet even with record high levels of tax funneling into the Treasury, the Chancellor only just meets his (already very loose) target for reducing the debt, which needs to see the ratio of debt to GDP falling by the fifth year of a rolling forecast. And there’s no guarantee he’ll meet this. The current forecast – which shows debt to GDP rising to 98.6 per cent next year, up from 97.9 per cent this year, and eventually falling to 94.1 per cent by 2028-29 – is predicated on the ‘government’s stated policy of increasing fuel duty rates in line with RPI inflation and the reversal of the “temporary” 5p cut.’
But the OBR isn’t convinced: not only has Hunt left himself half the headroom than the average to meet his fiscal rule (£13.0 billion compared to £27.9 billion) the OBR notes that if Hunt, like ‘all chancellors since 2011’ decides to hold rates where they are, ‘then more than 43 per cent of the headroom in 2028-29 would be removed and debt would no longer be falling in 2027-28.’
For all the talk of ‘hard decisions’, the government continues to dodge the big spending questions that are set to see debt continue to rise and borrowing to remain well above pre-pandemic levels. Hunt’s decision to uprate benefits with September's more generous inflation figures largely makes sense, not least given the current cost-of-living crisis continues to disproportionately affect the poorest. But his decision to – yet again – avoid the politics of the state pension and ‘honour our commitment to the triple lock in full’ is on its own a £30 billion commitment – one that is three times the size of his largest ever tax cut for business, and even trumps his entire fiscal headroom for every tax cut on offer.
It seems, then, that not every ‘tough decision’ really has been made. Tax cuts are very welcome. But it is becoming increasingly clear that they can only happen within the tight framework of a high-tax, high-spending state – one that is being solidified by the Tory party.
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