Markets may be sanguine, but political temperature remains high

Given the turmoil which followed his predecessor’s ‘mini-budget’ Chancellor Hunt may consider it as a result that financial markets greeted his Autumn Statement with little more than a shrug of the shoulders. In truth this was always going to be a delicate balancing act: settling nerves among the very wide community of investors in the UK demanding some degree of fiscal discipline against the backdrop of a cost-of-living crisis and an economy already in recession.

However politically astute the Autumn Statement was, its realities remain stark. Despite the announced tax increases and accompanying spending cuts, the OBR estimates that public sector net debt will still rise to almost 98% of GDP (recently 84%) by 2025/26 and fall only minutely to just over 97% by 2027/28. The main contributory factor is the recession expected to continue through next year followed by only modest growth from 2024 onwards: the OBR does not expect the UK to recover its pre-pandemic level of GDP until 2025. But it does expect CPI to fall after peaking this year allowing interest rates to peak in the first half of 2023 just below 5% before beginning a slow decline to around 3.5% by 2027/28. Feeding into those forecasts are its expectations that oil prices peak this year and gas prices next year.

That combination of factors produces one of the most striking features of the OBR forecasts: that tax receipts from all sources are expected to grow much more slowly over the forecast period. After a 10% jump in the current year (driven mainly by similar increases in income taxes, NICs and VAT) the growth in tax receipts is expected to slow to less than 5% in each of the subsequent five years. Even the much-vaunted windfall taxes on energy profits and electricity generators grow much less quickly after spiking in 2023/24.

And with the slower growth environment generally so too a slower growth in investment: broadly speaking the OBR expects business investment to flat-line through 2024/25 before recovering pre-pandemic levels in 2025/26 - three years later than its expectation set as recently as March of this year.

One important coda to the expected slow growth in central government tax receipts is a relaxation on local governments allowing them to increase council taxes by 5% instead of the 3% cap hitherto. It’s a nod to a greater devolution of powers from Westminster but also throws down a gauntlet for local politicians: if you want improved local services, you can raise local taxes with consequent challenge at the local ballot box.

Which brings the political context of this Autumn Statement into sharper relief.
The next general election must be called before the end of 2024 and while financial markets may so far be sanguine about the measures in the Autumn Statement, voters may be less so. OBR forecasts show the economy as measured by GDP to be in recession through 2023 and growing only weakly in 2024. In particular they show real household disposable incomes falling by over 3% in each of 2022 and 2023 (calendar years) - in aggregate the deepest squeeze on record - before beginning to grow again in 2024. That may become a factor pointing towards the general election being held later in 2024 or possibly in late 2023 (Q4) when the economy begins to turn upwards on OBR forecasts. In the meantime government party MPs will be concerned for the impact of the squeeze on their constituents especially against a backdrop of still high opinion poll ratings for the opposition Labour Party. Financial markets may be so far sanguine but the political temperature in the UK seems set to remain high.