FTI Consulting Public Affairs Snapshot: Autumn Statement 2023: Turning the Corner

After a year in the role, Chancellor Jeremy Hunt has delivered his second Autumn Statement. The overarching message was one of reinvigorating economic growth through small business investment and enhancing productivity, with 110 measures designed to incentivise growth and investment. Boosted by positive news on inflation last week, and under pressure from fellow Conservatives on delivering meaningful tax cuts, the Chancellor’s headline policy announced a 2 per cent cut to the main rate of employee National Insurance contributions, beginning on January 6. Backbenchers cheered at the Chancellor saying the economy was “turning a corner”: the hope is that today will also mark a corner being turned in the Conservatives’ fortunes.

The Chancellor’s upbeat tone and occasional comic asides implied a rosier economic picture than suggested by the Office of Budget Responsibility, who made a downward revision to UK growth forecasts for 2024, 2025 and 2026. They also implied a happier Conservative Party. But the well-document structural problems affecting the Conservatives persist, with recent polls making grim reading, and the narrative around tax cuts is partly a response to criticism that the leadership is simply too cautious. Given that – as Shadow Chancellor Rachel Reeves pointed out – taxes will still be higher at the next election than they were at the last, this is a gamble.

Other eye-catching measures included an increase in the National Living Wage to £11.44 and, for the self-employed, the abolition of Class II and cuts to Class IV National Instance. Absent from the statement, however, were cuts to inheritance and income taxes, which had been floated over the weekend. Cuts to income tax were deemed too inflationary for now, and cuts to inheritance tax, although popular with many in the Conservative Party, were judged as sending the wrong message given recent inflationary pressures. More problematic still is the fiscal drag caused by freezing the rates at which income tax would be paid. As wages rise, this is estimated to raise the Exchequer nearly £45bn by 2028-9.

There were also reforms to business tax. As the Prime Minister trailed on Monday, full expensing would be made permanent, allowing businesses to write off plant and machinery investments in full in what the Chancellor dubbed “the biggest business tax cut in modern British history”. The measure, which aims to encourage businesses to invest, and addresses the UK’s productivity gap, was welcomed by manufacturers’ organisation Make UK, who hailed it as a “major policy win”.

Also on investment, the Chancellor published and accepted all the recommendations of the Harrington review, which looked at how the UK could increase foreign direct investment. Combined with other measures, the OBR forecast that this will lead to £20 billion additional business investment every year for the next decade.

Hunt reaffirmed his commitment to improving the attractiveness of UK markets, highlighting his intention to move forward with Mansion House reforms on pension fund policy, something that both the Chancellor and the PM view as a legacy policy. Subject to market conditions, the Chancellor also announced that he would explore a retail share offer of NatWest in the coming months – helping get rid of one of the remaining hangovers from the 2008-9 financial crisis.

Small businesses, meanwhile, benefit from a freeze in the small business rates multiplier, and retail, hospitality and leisure businesses will see their 75% business rates discount extended for another year, plus a freezing of alcohol duty until 1 August 2024. Not celebrating will be smokers of hand-rolled tobacco, who see duty go up by 12% over and above RPI.

On welfare reform, Hunt promised wide-ranging reforms to benefits, making it clear that the Government’s appetite for more migration, despite a change in Home Secretary, is low. This marks clear blue water – not just with Labour and the Lib Dems but with many left-leaning Conservatives. The narrative from the top is that there is still a pool of potential workers in the UK and the focus should be on getting them working again. The carrot is a raise to the National Living Wage. The stick is the new plans to reform welfare, focusing on sickness, disability and the long term unemployed, and bringing in reforms to sick notes, work assessments and skills and employability courses. Under these plans, welfare recipients who do not get a job within 18 months will be given a mandatory work placement, while those who don’t look for work for a six-month period will have benefits stopped. This will doubtless be a lightning rod for controversy.

It has long been Labour’s aim to outflank the Conservatives as custodians of the UK’s economy, and Rachel Reeves’ response sought to do exactly that. Channelling Ronald Reagan, she argued that, come the next election, the central question would be “do me and my family feel better off after 13 years of Conservative governments?”. Today’s Autumn Statement used a larger than expected fiscal headroom to make the right noises about rewarding hard work and incentivising investment. Next March’s Budget sets out an opportunity for the Conservatives to go further down this road. The challenge for Labour will be to articulate what they would do differently. But, unless there’s a dramatic shift in polling, they might not need to work too hard.