Strategy blog: UK Autumn Statement - final thoughts
Our first thoughts have been confirmed as we've had time to consider the Statement more carefully. We had thought the new UK government was talking itself unnecessarily into "Austerity II" – overcompensating, perhaps, for September's fiscal farce. But as so often happens, the picture painted beforehand by an excitable media and "leaks" from the government spin machine turned out to be a caricature.
There is no net tightening until 2024-5 – indeed, this year and next sees a loosening of fiscal stance, largely on account of the energy bill support package and the cancellation of higher NI contributions (both legacy items from the ill-fated Growth Plan). The new measures in the Autumn Statement have no net impact this year or next.
And when the tightening does arrive, it does so gradually, and with a focus on corporate taxpayers. Public spending plans are not cut until 2025-26, and the cumulative net tightening over the six year period comprises two-thirds tax increases, and one-third spending cuts. Planned spending actually rises, compared to earlier plans, in 2023-4 and 2024-5.
Within this, and setting aside the previously-announced reversals of the Growth Plan's tax cuts, the increases in personal income tax are small, and are largely "stealth" taxes (that is, they focus on allowances and inflationary drag, rather than marginal rates). Nominal wages will be growing, and despite talk of "the squeezed middle", most earners will not notice them. Overall, the annual fiscal squeeze is projected to peak at 1.3% of GDP, in 2027-28, with the personal taxation component then at an inconsequential 0.1% of GDP.
Overall, then, the fiscal tightening – the widely-previewed "pain" – was smaller, later and less unfair than feared.
Note that there will be a general election by January 2025 (five years are up in December 2024, and the campaign itself will last a few weeks). Two-and-a-bit years is a very long time in politics (especially in today's Conservative Party). Voters' memories can be short, and base effects can be potent. With fiscal pain deferred and muted, the prospect of a (further) collapse in gas prices once we're through the winter, and a likely peak in mortgage rates during 2023, for many households the bottom may not be far off.
So if the belt-tightening was modest, does that mean that borrowing and government debt is poised to surge unsustainably?
No. Here too, much recent commentary has been hyperbolic. As we noted last week, the UK has had higher deficits and (prospective) debt ratios in the past, most recently in 2020-1. Other G7 countries' debt ratios are higher (the US, Japan, Italy, France). The UK government's creditworthiness is not in question (whatever the various ratings agencies may occasionally seem to suggest).
For sure, the extra supply of gilts as the deficit widens anew this financial year and next will put the gilt market under pressure – particularly since primary issuance will now be augmented substantially by secondary sales as the Bank of England gradually unwinds its QE. But we suspect that the most important driver of gilt prices will continue to be the business cycle, and in particular the prospects for inflation and policy rates. If inflation turns down markedly in 2023, we can imagine institutional buyers returning to help mop up the extra supply.
That said, we are not big fans of gilts at today's prices. They were briefly attractive after the September sell-off, but have since rallied a long way, and yields are once again on the low side – particularly in real terms. From the government's viewpoint, given that it has to help households and businesses with their energy bills, at these real yields it may make sense to borrow to do so.
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