How markets could dictate the outcome of the Autumn Statement

These include a mixed outlook for government indebtedness, sluggish economic growth, the upcoming UK election and the vivid memory of the last Autumn Statement which cost the then Prime Minister and Chancellor their jobs.

From an economic perspective, the most fundamental obstacle is the current level of debt to GDP, which sits around 101%, 22% higher than the EU average. Furthermore, the UK’s fiscal deficit was above the G7 average in 2022 and higher than any G7 country in Q2 of 2023. This is happening at a time when the level of taxation imposed on the economy is at the highest level since 1960 when the government was still rebuilding the nation’s finances in the wake of WW2. This gives very little leeway to Jeremy Hunt as he will, no doubt, seek to deliver some good news on 22 November.

Inflation is a double-edged sword. Wage growth was last recorded at almost 8% in the three months to August, which is a boon to tax receipts and public finances. However, a large portion of UK government spending obligations, estimated to be 55%, in the form of benefits, pensions and index-linked debt, are linked to inflation so not all the growth is reflected in improved finances. Also, higher inflation is a tax on the business and the consumer, so the treasury must hand back some of its gains if it is to invigorate the slowing of the economy. This is already visible as the government gives in to public sector pay rise requests. 

UK economic growth forecasts are proving to be more art than science. The Office for Budget Responsibility, or OBR, on which the government relies for its economic data, forecasts GDP contraction of -0.2% in 2023. This is on the low side as the consensus is GDP growth of 0.5% for 2023. Conversely, the OBR has generously forecast UK GDP growth of +1.8% and +2.5% in 2024 and 2025 respectively while the Bank of England expects economic growth of +0.5% and +0.6% in the same period. Consensus expectations lie on the side of Bank of England so it is likely that the OBR forecasts in aggregate will have to be moderated downwards, which will worsen the appearance of UK debt to GDP ratio and limit the chancellor’s ability to commit to large-scale spending this month.⁴

In any case, the current chancellor will be very aware of the risks that accompany large spending increases. Care will be taken not to promise spending which appears unfunded to avoid a repeat of the infamous Mini-Budget of 2023. While Tory MPs may wish for tax cuts to support their bids for re-election, they have seen firsthand the risks such a strategy carries.  

With so little room to manoeuvre, what tax measures could the chancellor be looking at?  Probably nothing dramatic – it might be safe to assume that we’ll see some tinkering around the edges rather than substantive policy changes.

If the chancellor does need to find funds to meet additional expenditure it seems unlikely that he would raise income tax given the ongoing cost of living crisis.  An increase to the capital gains tax rates is sometimes mooted in revenue raising times and would meet less resistance given the transactional nature of the tax.  However, the funds that could reasonably be raised would be modest and this could prove a barrier to investment in the UK.

Alternatively, given the growth in inherited wealth, the chancellor might give serious consideration to The Institute for Fiscal Studies’ recent paper on reforming the UK’s inheritance tax system.  Often cited as the UK’s most hated tax, a reform would be welcome by many, although there would need to be more losers than winners to generate revenue. 

If, however, the chancellor took the opportunity to also abolish the related non-dom rules at the same time, he would be able to raise a significant amount of additional tax revenue.  This would be a seismic change to the UK’s tax landscape and take some time to fully understand the impact but given the general political persuasion of the population who would be affected, such a move seems unlikely.  Even if the chancellor did choose to explore this avenue, the proposal would no doubt be culled when reviewed by his boss.

So there are some options available to the chancellor but whatever else is announced on 22 November, it’s a safe bet we’ll not see any significant tax cuts.

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