The Autumn Statement unveiled today (17 November) will see millions of people paying more in taxes, and lays the groundwork for real-terms cuts to many areas of public spending in the coming years, economists have warned.
Analysis of the impact of freezing tax thresholds, or so-called ‘stealth taxes’, suggests the average full-time worker could end up paying as much as an additional £472 per year in tax next year. While the initial support package for energy bills has been cut back, some additional measures have been put in place to help the most vulnerable, and the government has committed to lifting social security in line with inflation.
Economists have accused Jeremy Hunt of talking down the public finances in a bid to distract from “the longest recession on modern records coinciding with skyrocketing costs of living”. Despite changes to the way that assets are taxed, which will see wealthier people paying more tax on dividends and capital gains, experts warn they will “continue to enjoy significant preferential tax treatment compared to working people”.
Hunt criticised for prioritising ‘short-term political gain’
The Chancellor sought to contextualise the measures announced in the autumn statement by highlighting the UK’s economic outlook, with the OBR noting that the country is “now in recession”. Alfie Stirling, director of research and chief economist at the New Economics Foundation, points out that the UK now faces the “longest and deepest recession among rich countries,” and suggests that this has been caused in large part by “a decade of austerity”.
He said: “The Chancellor is talking down the public finances to distract from the actual crisis: the longest recession on modern records coinciding with skyrocketing costs of living.
“The UK is facing the longest and deepest recession among rich economies, and this is largely of our own making. A decade of austerity undermined our economic fundamentals and left us vulnerable. Mismanagement of the pandemic increased the number of long-term sick unable to work. Overly aggressive interest rate rises have derailed our recovery from Covid. And the Truss-Kwarteng mini-budget undermined our economic credibility. Today’s latest round of spending cuts is simply going to repeat the pattern all over again.”
While a number of individual measures announced in the autumn statement have been broadly welcome by experts, Hunt has been accused of prioritising short-term political issues over underlying, long-term economic problems. Former Treasury official and director of the Progressive Economic Forum, James Meadway, said: “Instead of plans to put the NHS, schools and public capital spending on a solid base for future, the Chancellor has prioritised a few short-run increases followed by cuts in the longer term.
He said that higher taxes for the majority of people are “neither fair nor necessary,” and suggested the Chancellor could have raised more than £15 billion by equalising capital gains with income tax.
These criticisms were echoed by Robert Palmer of Tax Justice UK, who said the slight increases to taxes on wealth and the windfall tax are “not enough”. He said: “This was Jeremy Hunt's chance to use higher taxes on the super-rich to invest in our public services. Instead we have plans for billions of pounds of spending cuts in the coming years.”
Chris Hayes, senior analyst at the Common Wealth think tank, questioned whether the Chancellor’s “rhetoric about letting the broadest shoulders carry the greatest weight” matched up to the policy measures he announced. He said: “Despite cutting the tax-free allowance for dividends, asset owners continue to enjoy significant preferential tax treatment compared to working people. Instead of closing that unjustifiable gap, the Chancellor has opted for further austerity for our teetering public services.”
In political terms, the measures announced by Hunt would seem to signal a significant shift in the dominant ideological current of the Conservative Party, away from the free-market approach which informed Kwarteng’s mini budget.
Tony Yates, an economist at the Resolution Foundation said the autumn statement “seems to mark a pretty clear change in power from the right to the left of the Tory Party”.
He said: “The gap between spending and tax revenue, maybe about £30bn, is being closed mostly by taxes now, increased taxes on higher earners, windfall taxes on energy, and the tightening of real spending is pencilled in for after the election, when we have to doubt whether it will happen at all.
Yates welcomed the government’s decision to alter the existing fiscal rules and predicted that the budget will “minimise the political damage from the last few months”. He added: “But with real incomes set to fall for the next two years, and nothing in sight to sort out the NHS crisis, the government is in a particularly grim political situation and faces a huge uphill battle to win the next election.”
Energy price guarentee and windfall tax
Hunt confirmed that the energy price guarantee will rise - but said the government will offer more targeted support for the vulnerable.
The Energy Price Guarantee that currently keeps annual average bills at £2,500, which was first introduced by former Prime Minister Liz Truss, will remain in place until April 2023. From then onwards, the government will continue to offer support, but it will be less generous, with energy bills rising to £3,000 for the average household.
The Chancellor also announced an increase in the windfall tax on oil and gas giants from 25% to 35%, taking the headline rate of tax for the industry to 75%, although allowances remain in place for investment.
Tessa Khan, director of anti-fossil fuel campaign group Uplift, welcomed the rise in the windfall tax but said that the Conservatives are still “doing the exact opposite of what’s needed”. She said: “The rise in the windfall tax is welcome, but while massive tax breaks and loopholes remain – which let oil and gas companies like Shell escape the tax if they invest in new North Sea fields – the government is doing the exact opposite of what's needed to get us out of this hole for good. New oil and gas fields won’t lower bills.”
Responding to the announcement and support for those on the lowest incomes to deal with rising energy bills, the chief executive of National Energy Action said “there is now no end in sight to the energy crisis for struggling households”.
Adam Scorer warned that while the support for those on the lowest incomes is welcome, many other vulnerable groups will be reliant on local authorities for further support, at a time when councils are likely to struggle to maintain services.
He said: “Boosting welfare payments and the targeted support that has been announced for energy bills will help some of the poorest households and at-risk groups, that's important, but there are big gaps in these measures especially for low-income households not on means-tested benefits. The reductions in universal support will make these gaps even more challenging.
“Many other vulnerable groups – those with medical health conditions and carers for example – who could have been targeted for additional direct support, are now at acute risk of being left out in the cold unless they are supported by local authorities.
“With deficit budgets and nothing left to ration, too many could fall further into overwhelming debt or go without energy entirely, to the acute detriment of their health and wellbeing. Even those who will receive cost-of-living payments will find it practically impossible to sit on this cash payment and only channel this money towards soaring energy bills.”
Benefits uprating and cost of living payments welcomed
The Chancellor also announced that there would be more targeted support for those on low incomes, disability benefits and pensioners. Those on means-tested benefits will receive an additional £900, while an extra £300 will be given to pensioners and £150 to people in receipt of disability benefits.
He also confirmed that benefits will rise by 10.1% from April 2023 for ten million households, in line with inflation.
Speaking on benefits uprating, Rebecca McDonald, chief economist for the Joseph Rowntree Foundation, said: “It will be a huge relief to families on benefits that they are not facing what would have amounted to a historic cut. In taking this stand, the government has acknowledged that people cannot withstand benefits being eroded any further.”
A concern about cost of living payments raised by Ms McDonald however is the timeframe for the promised payments - as households will not receive them until April, according to what Hunt said in the House of Commons. She explained: “Families are facing the worst winter many will remember and can’t wait for April – they need the help now to get through a winter of soaring costs. Even with uprating, rates are at historic lows and households facing difficult times are increasingly not able to cover the essentials.”
She also expressed anxiety for families who are still struggling to afford their bills and put food on the table, but who do not qualify for benefits - and who therefore will suffer most when the Energy Price Cap Guarantee rises to £3,000 come April. She said: “The use of one-off payments to help with the cost of living may mitigate some of the looming disaster, but those who narrowly don’t qualify will be hit hard.”
Sam Tims, an economist at the New Economics Foundation, was decidedly more critical of the government’s autumn statement - arguing it is not doing nearly enough to help those struggling. He said: “Today’s announcement to increase social security payments by inflation keeps things as they are: with the benefits system plagued by the ongoing impact of austerity.
“Support is still far below what families need,” he continued, “forcing people to go without heating and rely on foodbanks, particularly those impacted by the benefit cap, which should have been scrapped, not increased.”
He conceded that the extension to cost of living support for vulnerable households is a “good” thing, but argued that “sending them out as a separate payment will penalise some working households.” He added that “over 500,000 people missed out on the first payment this way.”
Meanwhile, director of policy and campaigns at Action for Children Imran Hussain also argued that more should have been done. He said: “Families we support will be greatly relieved that the Chancellor has increased benefits in line with inflation next April. But even with this rise, previous rounds of cuts and freezes mean that basic benefit levels are still well out of step with what families need to live on.”
He also criticised the Chancellor for not clarifying whether or not “the urgent investment called for by the landmark Independent Review of Children’s Social Care” will be provided, arguing that this is “urgently needed to transform the sector, reduce harm, and save money in the long run.”
Mr Hussain added that his organisation’s analysis revealed that soaring inflation could lead to more than 23,000 vulnerable children missing out on support in the coming year.
Hunt accused of ‘tax grab’ over threshold freezes
The government has been accused of a “tax grab,” which could see the average full-time worker paying up to an additional £472 per year in tax next year.
Hunt announced that he will freeze the income tax personal allowance at £12,570 until April 2028, meaning anyone who earns more than this will pay more tax.
Joe Nellis, professor of global economy at Cranfield School of Management said that the result of freezing the tax thresholds will be that workers experience a ‘fiscal drag’, “meaning that as wages increase, those on the lowest salaries will be pushed into higher tax brackets”.
“This is simply a tax grab by The Chancellor,” he said.
“Unless the tax thresholds rise with inflation, fiscal drag will hurt millions of people in the UK. These tactics by The Chancellor are the equivalent of charging a worker earning the average UK salary an additional mobile phone contract (£38.22) every month. Freezing the tax threshold means higher taxes for everyone.”
Hunt also announced that the threshold at which the top rate of income tax is paid will reduce from £150,000 to £125,140, but said he was not raising headline rates of taxation. He said those earning £150,000 or more will pay just over £1,200 more a year.
Universal credit claimants to face more conditionality and potentially sanctions
Benefits rising in line with inflation was not the only piece of news for Universal Credit claimants. Hunt also announced that 600,000 more people receiving the benefit will be asked to meet with a dedicated "work coach" to help them increase their employment hours or earnings.
Addressing MPs, he said Work and Pensions Secretary Mel Stride will review "issues holding back workforce participation", which will conclude early in the new year. The Chancellor also said he wanted to help people already in work to raise their incomes, progress in employment and become financially independent.
Hunt continued: "That is why we will ask over 600,000 more people on Universal Credit to meet with a work coach so that they can get the support they need to increase their hours or earnings." He added that he would be "moving back the managed transition of people on employment and support allowance to Universal Credit to 2028."
Melanie Wilkes, head of research at the Work Foundation at Lancaster University, a leading think tank for improving working lives in the UK, said she is “concerned” by this new measure and believes the government’s plan to put more people under pressure to meet Universal Credit requirements “ignores the deep challenges that many face in trying to find a job or stay in work.”
She said: “Requiring people – who are unwell, disabled or have caring responsibilities – to meet a work coach and threatening them with the risk of a sanction to their benefits risks doing a great deal more harm than good, particularly in the context of the recession.”
Wilkes also warned that the Chancellor’s new plan would be difficult to deliver “without significant investment in our [already stretched] employment support services,” and argued that a better, alternative solution would be to offer specialist support to those on benefits who want to work “on a voluntary basis, with no impact on their entitlement to essential financial support.”
How have the markets responded?
The pound has dropped against the dollar after today’s financial statement. At 8am, sterling was 1.195 against the dollar, however it has steadily dropped 1.178 since then.
According to Mike Owens, UK Sales Trader at Saxo, Hunt’s “fiscally prudent” autumn statement has given the “markets a share of confidence looking ahead.” He admitted that it has painted a “bleak picture of the state of the UK economy”, but argued that the pound falling is a result of “people selling off in reaction to the OBR’s new UK GDP forecast for 2023.”
He continued: “Shares prices of energy companies like SSE, Centrica, National Grid and Drax slipped in early reaction to the news but have since bounced on confirmation that the energy price cap will extend for another year. Share prices of banks have also gained as the surcharge of profits over £100 million is to be cut to 3% from 8% from April 2023 in an effort to offset the impact of the corporation tax rise.”
Owens did however express some concern for who is paying for this market reassurance, commenting that “working UK taxpayers will now be picking up much of the slack.” He said that the ‘stealth tax’ caused by the two-year extension on freezing current income tax thresholds means “as wages grow, people will be paying more”. This is because they will move into higher tax brackets, and, Mr Owens argued, will “cost taxpayers millions over the next five years."