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Economics 101: Autumn Statement – The Fiscal High Wire

By Max Shepherd, Group Economist at Accord MortgagesMaxshepherd-2

Overview

On 22nd November, Jeremy Hunt announced his Autumn Statement, laying out his fiscal plan with the aim of achieving somewhat conflicting goals. The Chancellor is walking a tightrope between sustaining the progress made towards controlling inflation and attempting to gain ground in the polls. 

Only time will tell whether or not he successfully navigates the high wire, without falling off to either side. You could argue he can’t even afford one miss-step, given the spectating electorate’s patience is understandably wearing thin, after watching his predecessors fall off one after another. Case in point; the mini-budget late last year.

Background

Let’s start with the positives for the Chancellor. Nominal GDP (not accounting for inflation) is 6.9% larger than the Office of Budget Responsibility (OBR) had predicted in their March 2023 forecast. This in turn has led to the government generating £15bn more in revenue than forecast, through taxation. 

Furthermore, the government has borrowed £20bn less than expected over the period to September. This, alongside stronger than expected wage growth, affords the Treasury more wiggle room than anticipated, to increase spending or cut taxes.

That being said, the debt to GDP ratio has increased from 95.3% in January 2023 to 97.8% in September, and the tax burden as a percentage of GDP is at its highest level since the aftermath of World War 2. 

Research from the Institute for Government shows the performance of public services including general practice, hospitals, social care, police, criminal courts and prisons have all declined since 2010. The only saving grace in the research was the performance of schools, which improved between 2010 and the pandemic. This didn’t last long however; performance of schools has since declined between the eve of the pandemic and now.

This problem will likely continue as the cost to run public services is spiralling, in tandem with inflation and wage growth. In real terms, keeping departmental budgets stationary is in fact reducing them. Considering inflation peaked at 11.1% in October 2022, and is still above the 2% target, and is expected to stay there throughout 2024, it is a fiscal illusion to suggest that higher than expected tax revenues automatically results in a better outlook for public finances.

Key policy announcements

There were 110 policies announced with the primary aim of increasing growth expectations. The main measures are listed below:

  • Cutting national insurance for employees by 2 percentage points
  • Scrapping class 2 national insurance paid by the self-employed
  • Making the ‘full expensing’ tax relief for business investment permanent
  • Increasing welfare payments by 6.7%, in line with inflation
  • Increasing the state pension by 8.5%, in line with wages
  • Extending 75% discount on business rates for retail, hospitality, and leisure

Housing policy

Below is a non-exhaustive list of policies which relate to the housing market. Given the gravity of the housing supply issue, and the media attention this attracts, there doesn’t seem to be a lot to write home about. On the one hand, there are no policies which will stimulate housing demand, but equally there is nothing which will stimulate the supply of housing.

Mortgage Guarantee Scheme extension The Mortgage Guarantee Scheme supports the availability of 95% Loan-to-Value mortgage products. While the scheme was due to close to new accounts on 31 December 2023, the government will extend the scheme for an additional 18 months until the end of June 2025 to continue helping prospective borrowers with smaller deposits buy a home.

Affordable Homes Guarantee Scheme The government is expanding the existing £3bn scheme by a further £3bn to support housing associations to access cheaper loans for quality and energy efficiency works, as well as new homes.

Home buying and selling – The government is providing £3m for a range of measures to improve the home buying and selling process, including pilots to develop property tech products and to digitise local council property data.

Local Authority Housing Fund 3 – The government is announcing £450m for a third round of the Local Authority Housing Fund to deliver 2,400 new housing units to house Afghan refugees and ease wider housing and homelessness pressures. This will bring the total amount spent on the Local Authority Housing Fund to over £1.2bn.

Permitted Development Right to convert one house into two flats – The government is announcing a consultation on a new Permitted Development Right for subdividing houses into two flats without changing the façade. This will be implemented in 2024 following consultation early in the New Year.

Impacts

The statement overall brought a fiscal stimulus of £7bn (0.2% of GDP) in the remainder of the current financial year and £14bn (0.5% of GDP) in 2024/2025.

The OBR has produced a revised economic forecast integrating the new policies, which shows GDP growing in 2024, albeit modestly, and similar growth in the medium term compared to the forecast in March. 

The cut to National Insurance will likely stimulate economic growth modestly, but not enough to materially impact inflation. Post policy measures, the government is not expected to borrow more than previously forecast over the next 4 years, in part due to the notable absence of any material departmental budget increases. This will put further strain on public services, which are already struggling.

The Autumn Statement tax cuts are “dwarfed by tax rises already underway”, set to make households an average of £1,400 poorer, the Resolution Foundation said, and the tax burden is set to rise further in the medium term, despite the headline National Insurance cuts.

Summary

The Autumn Statement has been characterised as sensible, not sensational. More needs to be done to address the affordability of housing, and the decline in the performance of public services, and this is especially challenging in a high inflation environment. 

The headline-grabbing National Insurance reduction may help the Conservative’s standing in the polls, but we are unlikely to feel any better in the short to medium term. The OBR does not expect the policies to cause an increase in inflation, and market expectations of interest rates haven’t increased following the announcement. The market still expects we have reached the peak in bank base rate, and the first interest rate decline will be in the second half of 2024. 

Hopefully this allows for a steady decline in mortgage rates, but they are expected to stay above 4% for the years to come.

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