Having been delayed several times already, today’s autumn budget came against a very different backdrop to the one we saw at the end of September, when yields started their sharp move higher, and the end of October, when it was originally slated to be announced. .
With gilt yields now back at more normal levels and the pound fully recovered from the lows we saw in September, it would appear that, in the words of Bank of England governor Andrew Bailey yesterday, most of the risk premium from the events in September has come out. To all intents and purposes, this should have meant that a particularly austere budget needn’t have been necessary, especially if it makes the UK a less desirable place to do business. This is perhaps why today’s fiscal statement was so important, in terms of the framing of the debate around the economy over the next few years, as well as how to manage the transition away from fossil fuels, while at the same time keeping inflation in check.
The Bank of England is already predicting that the UK economy is facing a two-year recession, while inflation has risen to 11.1%. Today’s budget should have walked the line between pushing inflation lower, without completely crushing demand in the economy with too many tax rises, and spending cuts. Initial analysis of today’s package suggests that we’ve got a lot of the former, and not too much of the latter, which is bad news if you’ re looking to get businesses to invest. Initial market reaction doesn’t appear to be especially positive, with sterling lower and gilt yields higher.
So what did we get? The fiscal outlook looks bleak, with the OBR predicting that the UK is already in recession, although they upgraded their GDP forecast for this year to 4.2%, while downgrading 2023 to -1.4% from 1.8%, before then rebounding in 2024. Inflation is expected to be at 9.1% this year, coming down to 7.3% in 2023, while unemployment is expected to rise to 4.9% in 2024 from 3.6% now.
The OBR also predicted that living standards could fall by as much as 7% over the next two years, and house prices could fall by 9%, a truly sobering outlook, and it appears that it is this assessment that is prompting some weakness in the pound, and a slight move higher in gilt yields.
The chancellor went on to outline that his intention was to halve borrowing over the next five years, to the point that it should not rise above 3% of GDP.
On tax rates, the 45% threshold was lowered from £150,000 to £125,000, while personal allowances have been frozen until 2028, pulling more and more people into the higher rate of tax. The reduction of dividend and capital gains tax (CGT) allowances were also slashed, with CGT reduced from £12,300 to £3,000 by 2024. Electric vehicles will also be subject to Vehicle Excise Duty from 2025.
One of the more controversial measures was the extension of the energy profits levy for oil and gas producers to 35%, pushing the effect tax rate on UK profits to 75%, until 2028. Hunt said that he was keen for the measure to be temporary, however as with all taxes, once implemented they tend to become permanent. Let’s face it, it's already been extended once in the space of a few weeks, so how temporary is it likely to be?
It’s also a blow for the likes of Harbour Energy and EnQuest, whose main business is very much UK-based, and could well deter future investment in the North Sea basin. It’s not such a problem for the likes of BP and Shell, whose broader international exposure means that any future windfall is likely to have a lesser effect.
The most eye-catching item is a 45% levy on the “excess profits” of low-carbon energy generators from 1 January, which initially hit the share prices of SSE and Centrica, however the shares soon recovered after it was announced that the energy price cap would rise to £3,000 from next April, up from the current £2,500.
The new windfall tax is estimated to raise at least £14bn next year, but that misses the wider point that there weren’t any incentives to invest in new renewables capacity over the next five years.
There was no windfall tax on the banking sector, which is a welcome relief for the likes of Lloyds and NatWest Group. Housebuilders were also breathing a sigh of relief, after the stamp duty cuts which were announced a few weeks ago weren’t cut immediately, but will end on 31 March 2025, with Persimmon edging higher.
The chancellor also mentioned a new international tax deal that would ensure big tech companies pay tax in the jurisdiction they operate, which is expected to raise £2.8bn by 2028.
On the plus side there was no cut to capital investment, with the chancellor confirming that Northern Powerhouse rail, HS2 and East-West rail would still go ahead, as would the building of a new nuclear power station at Sizewell C.
There is no question that the UK economy faces a myriad of problems, political dysfunction being the most notable, not only from the governing party, but also the opposition, who have had their own share of issues in recent years. In conclusion, the chancellor has taken the decision to raise the tax burden for everyone for the next five years, by virtue of fiscal drag, while imposing increased costs on business in the form of windfall taxes, that may or may not be permanent.
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