Reform Analysis: Autumn Statement 2023

Today’s Autumn Statement was something of a general election starting gun: tax cuts for individuals, tax cuts for businesses. The rabbit was a 2p cut to employee national insurance.

But the positive spin — “in the face of global challenges, we have halved inflation, reduced our debt and grown our economy. As a country we are sticking to a plan that is working” — can’t mask a poor fiscal outlook. Compared to its March projections, the OBR is forecasting lower growth through 2026, which is unfortunate for a Chancellor who has just announced 110 growth measures.

Everyone knows that fiscal ‘headroom’ isn’t real money — it’s the gap between the fiscal rule you set yourself, in this case debt falling as a percentage of GDP in the fifth year of the OBR forecast, and the expected outturn — and in times of volatility is even more nebulous. Just a few weeks ago the Chancellor was expected to have around ￡13 billion in ‘headroom’, now he has around ￡25 billion. And he didn’t even have to do anything!

The really responsible approach would have been to bank at least a chunk of that headroom in case the winds reverse direction. A second option would have been to offset some of the inflationary pressures on departmental, and therefore public service, budgets. But if politics — and, to be fair, continuing cost of living pressures and a desperate need to stimulate business investment — demanded tax cuts, then the Government made some pretty good choices. The NI and full expensing measures are discussed below.

However, as everyone has noted, these cuts are in large part possible due to the revenue raising fiscal drag caused by a long freeze to the income tax and NI thresholds, and even tighter (read totally unrealistic) departmental budgets in the next Parliament. Day-to-day spending is now projected to increase by just 0.9% in real terms from 2025-6. Oh, and we now have a real terms cut to public sector capital investment (head, desk).

On public service spending, the OBR say that if certain budgets continue to be protected, the Treasury’s post-SR21 envelope for total RDEL spending would leave ‘unprotected’ budgets needing to fall by 2.3 per cent a year in real terms from 2025-6. And if defence and aid spending increase in line with stated ambitions, unprotected spending would need to fall by an average of 4.1% a year.

With characteristic understatement the OBR tells us: “Overall, the Government’s post-Spending Review plans present a significant risk to our forecast.”

Which, of course, is one of the key reasons we need to stimulate growth — to pay for public services. And so to end on a less gloomy note, the Government have announced a whole raft of supply side reforms designed to stimulate investment and encourage work, some of which we highlight below and many of which we welcome.

Click here for the Reform team’s itemised analysis!