The UK Economy: After the Autumn Statement
Last week the Chancellor delivered his Autumn Statement; in our Monday Interview this week, Deputy Director for Macroeconomic Modelling and Forecasting, Stephen Millard, interviews Associate Economist Hailey Low. They discuss the key points, from the current outlook for the UK economy and what the Chancellor could have done differently.
Could you describe the UK economic outlook faced by the Chancellor as he delivered his Autumn Statement on Wednesday?
The Autumn Statement was delivered against a backdrop of flat-lining output and inflation remaining uncomfortably above the Bank of England’s target. That said, the Bank of England’s Monetary Policy Committee (MPC) has made significant progress in bringing inflation sustainably back down to the 2% target. I cannot emphasise this fact enough, as the Prime Minister and Chancellor seem to be taking credit for the progress in tackling inflation. This is worrying as it appears to be stepping into the Bank’s territory and challenging its statutory independence.
Since the Spring Budget, the economy has fared better and proven more resilient than expected with recession avoided, as also noted in our recent Autumn’s UK Economic Outlook. That said, the OBR, in their latest Economic and Fiscal Outlook, have revised up their projections for inflation to 3.6% in 2024 and 1.8% in 2025 and expects the economy to grow even more slowly over the forecast period with real GDP growing only 0.5% higher over the medium term as compared to their March forecast.
The fiscal outlook continues to look bleak as the Chancellor continues to constrain his tax and spending decisions by arbitrary “fiscal rules”, which, together with the series of tax cuts and spending changes announced last Wednesday, will put further pressure on public finances after the next general election. Whoever becomes the next Chancellor will face a stark choice between steep cuts to already frail public services or more tax rises to help restore them.
Given the Chancellor had some additional ‘headroom’ against his fiscal targets – though NIESR has long argued against these arbitrary rules – what else do you think the Chancellor could have done?
To recap, the Chancellor has spent almost all the fiscal headroom brought about by higher-than-expected inflation by delivering a package of tax cuts, all of which the OBR forecast to provide only a modest boost to output of 0.3 per cent in 5 years. But some headroom against his fiscal targets remained. UK capital spending — private and public — relative to the size of the economy has been consistently below that of other advanced economies for decades, and this has contributed to economic stagnation since the 2008 financial crisis. The Chancellor could have used some of the fiscal headroom to increase the level of public investment. NIESR has argued that we need to increase public investment to at least 3 per cent of GDP annually if we really want to create the conditions for higher business investment and growth in the UK economy. Public infrastructure investment, notably in transport, health, networks, and the green transition, could also “crowd in” private investment, leading to higher productivity growth and GDP.
Additionally, I feel that the fragile NHS, having suffered from the prolonged underinvestment in healthcare by the UK government, should be a top priority for the Chancellor, particularly given the rise in long-term sickness. The current backlog for the NHS in England alone has risen to 7.7 million, 3.5 million higher than pre-pandemic level, with around 1 million waiting for more than one treatment. As such, I strongly urge the Chancellor to be cognizant of the seriousness of this issue and start putting in place a structured and targeted plan to revive the healthcare industry before it has more knock-on consequences for the broader economy.
While it may be a missed opportunity not to utilise the additional headroom to address more pertinent issues, I strongly hope the Chancellor and any future Chancellor (whatever their political affiliation) look beyond the short term and focus on long-term sustainability. Strategic plans are always beneficial for the long-term growth of a country, and long-term prosperity hinges on long-term strategy.
What were the main tax and spending changes announced by the Chancellor on Wednesday, and to what extent will they help improve UK economic prospects?
I commend the Chancellor’s efforts to boost growth in the United Kingdom through his “110 growth measures”. The announced measures were mainly targeted at boosting growth through stimulating business investment and providing some relief to households struggling with cost-of-living.
Starting with measures aimed at boosting growth, “full expensing” for business capital spending – allowing companies to set 100% of investment in qualifying plant and machinery against tax – was made permanent. The lower effective tax rate on investment will enhance the UK’s competitive position internationally and increase the attractiveness of capital formation in the long run. The other spending changes announced include a £4.5 billion support to manufacturing sectors, £50 million to apprenticeships, a support package for small businesses, tax benefits for freeports and investment zones and reforms to the way planning applications are handled. While these moves overall represent well-intended steps towards boosting growth in manufacturing sectors and provide some respite to small enterprises, more strategic and targeted actions are required. In a report published by NIESR, we underlined the importance of reviving the manufacturing sector to boost productivity in the United Kingdom. In addition, the sluggish productivity growth in the UK since the global financial crisis has shown the need for a comprehensive strategy to revive the manufacturing sector.
Turning to tax and benefit changes, Class 1 National Insurance – the main rate – was reduced by 2 percentage points from 12 per cent to 10 per cent for earnings below £50,250, Class 2 contributions were abolished and Class 4 contributions were reduced from 9 per cent to 8 per cent. All workers will see some benefits to their disposable income, with the exclusion of pensioners and those whose income does not reach the National Insurance threshold of around £12,570 annually. While this is positive news as it provides some relief to households still facing cost-of-living difficulties, it disproportionately benefits high-earners rather than workers in lower-income brackets. The OBR stated the cumulative changes would incentivise an additional 28,000 people into work, but at a cost of around £10 billion per year, implying a cost of over £360,000 per person!
On the welfare side, the National Living Wage has been raised to £11.44 per hour, which is good news for lower-income groups. The state pension will be uprated by 8.5 per cent in April 2024, and universal credit and other benefits will rise by 6.7 per cent, in line with September’s inflation number. Also, the local housing allowance will be unfrozen and increased to the 30th percentile of local market rents. Considering that rent constitutes a considerable proportion of income, and we have seen rents rise significantly over the past year – this measure will provide some relief. As always, any measures aimed at raising welfare standards and levels will always be positively welcomed against the backdrop of the sharp falls in living standards we saw in 2022 and earlier this year.
‘Full expensing’ of business investment has now been made permanent. What do you think will be the impact of this change on business investment and GDP moving forward?
NIESR has long argued that low private and public investment is a key contributor to the UK’s poor productivity performance; so taking steps to boost business investment was music to my ears. ‘Full expensing’ means a lower effective tax rate on investment, increasing the attractiveness of capital formation in the UK in the long run and enhancing the UK’s competitive position internationally. In NIESR’s Response to the Autumn Statement, we estimated that this move would lead to a sustained 2.5 per cent increase in business investment and increase GDP by 0.2 per cent in the long run. While this looks modest, it will bring lasting benefits to the economy in the long run, as also noted by the OBR.
However, we think that the benefits of full expensing are insufficient to counteract the effects of the increase in the corporation tax rate from 19 per cent to 25 per cent in April 2023. It is also crucial for the government to consider the potential for full expensing to create a bias towards investment in tangible assets over intangible ones, such as training and development. That said, full expensing is a move in the right direction. However, businesses and investors seek an attractive, conducive environment in which to invest. Therefore, to capitalise on the measures in this Autumn Statement to boost investment and growth, I would still call on the UK government to improve the state of Public Services and Infrastructure by increasing public investment.