The autumn declaration is unlikely to make a big dent in the tax burden – here’s why
It is autumn declaration time.
Once upon a time, these winter budgets used to be brief updates to the fiscal forecasts, never overshadowing the far more comprehensive main budget in the spring. Or at least that’s what we’re told.
In practice, for as long as I’ve been covering finance, the Autumn Statement (or, as Gordon Brown used to call it, the Pre-Budget Report) has simply been the Chancellor’s second bite at the fiscal apple – a Budget altogether. but name.
In other words, these statements are quite a big deal.
They have been used to raise taxes and cut them, to raise spending and lower them.
Indeed, it was at Jeremy Hunt’s first Autumn Statement last year that he introduced some of the tough measures to clean up the economic mess following predecessor Kwasi Kwarteng’s mini-budget – freezing income tax and National Insurance thresholds right up to 2028, setting aside millions. of families to higher taxes.
This time we are all told that the story will be very different – especially that tax cuts are now imminent.
We’ll get to those cuts in a moment – and the bizarre pantomime of a government claiming it’s cutting taxes even as it’s doing the exact opposite – but let’s start by getting the “head square” out of the way.
If you’ve been following any of the coverage of the forthcoming Autumn Statement, you’ll have undoubtedly read about how the Chancellor may now be ready to start cutting taxes because he’s been told he has enough “headroom” to do that.
It all sounds pretty scientific, doesn’t it – as if a universal measure of fiscal probity has determined that cutting taxation would now be a sensible point. Except of course it isn’t.
In this case, “head height” actually means something very specific.
This government, like most of its predecessors since Gordon Brown, has set itself some fiscal rules designed to bolster confidence in its policies.
The main rule for Mr Hunt is that he has committed to reducing national debt as a percentage of gross domestic product (GDP) within five years.
This is, I cannot emphasize enough, a self-imposed rule. Of course: in light of what happened to the previous Tory government (which briefly avoided fiscal rules) there is a strong case for these rules. But they are by no means tablets of stone.
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Regardless, the debt rule is where the concept of “head space” comes from. By the end of the five-year forecast horizon mapped out in March (the Budget – the last time these figures wreaked havoc updated) Britain’s net debt was falling slightly. The fall corresponded to around DKK 6.5 billion. Voila: that’s the headroom!
Fast forward another six months and a few things have changed.
First, the economy looks a bit bigger than it did in March. This is partly because it has grown slightly faster than expected, but mostly because the Office for National Statistics has reassessed its perception of the size of the economy.
Also, because inflation was higher than expected, the cash size of the economy looks a bit larger, while the size of the national debt is less changed.
All together, and because of these mostly statistical artifacts, the national debt suddenly looks a bit smaller as a percentage of this GDP number. The result is that the apparent “head space” against this rule is considerably larger: possibly £15bn. or perhaps even over £20bn.
These amounts are, it is worth emphasizing, quite arbitrary. They mostly reflect neither that the economy is much healthier than it was back in March, nor indeed that the government’s decisions have made a big difference to the size of the national debt. They are marked against a completely self-written fiscal policy rule. And yet the “headroom” the chancellor is left with is still less than his predecessors tended to enjoy.
Despite all these caveats, the government is likely to use these rules as justification to start lowering taxes.
Yet there is also a big caveat here. The total tax burden (the amount of tax we as a country pay as a percentage of our national income) is increasing.
Based on the latest figures from the Office for Budget Responsibility, it is actually far higher now than it was before Rishi Sunak became prime minister, and is set to rise to the highest level since comparable records began in 1948.
These are the bits of context it’s worth keeping in mind ahead of this event.
The economy is flattening. The scale of Britain’s total debt is now far, far higher than before the pandemic. And it is difficult to imagine a scenario where the total tax burden ends up being lower next year than when this chancellor took over.
None of this will stop Mr Hunt and Mr Sunak from putting as positive a gloss on the economic update as they can. But their task will not be easy.