Autumn Statement 2023 - Macro perspective

UK financial markets were unmoved by today’s Autumn Statement. In the context of last year’s “mini-budget” that will count as a dramatic success. New OBR forecasts suggested Chancellor Hunt had some £27 billion of ‘headroom’ which he applied to cuts in National Insurance, changes to “full expensing” of capital allowances and faster uprating of some welfare benefits. But some of the fiscal easing measures and OBR upgrades are front-loaded to the near-term suggesting a nod towards the timing of the next general election.

The macro context

For all the customary flair and occasional levity with which Chancellor Hunt delivered his (last?) Autumn Statement key financial markets were left broadly unmoved: the FTSE 100 index, long-dated gilt yields, and the value of sterling against its major counterparts were barely changed during and since the set piece.

In fairness financial markets are a tough audience at the best of times but, on this occasion, their apparent indifference probably better reflected the realpolitik of the overall shape of the budget than the enthusiastic response of some backbenchers.

According to the accompanying OBR forecasts the size of the UK economy in real terms following the measures announced today will be only ½ percent higher “in the medium term” than in its March forecast and the tax burden (receipts as a percentage of GDP) will still rise to a post-war high of 37.7% albeit a little later in 2028-29.

But a half percentage point of growth in a £2.5 trillion economy can make a big monetary difference and, combined with falling inflation and broadly unchanged (nominal) departmental spending, has cut the OBR forecast of government borrowing in 2027-28 by £27 billion.

It is that ‘headroom’ that Chancellor Hunt has applied to the cuts he announced in National Insurance, to making permanent the ‘full expensing’ of capital investment in the first year and to uprating welfare benefits for lower income groups by the higher inflation rate in September rather than the more usual October reading.

Elsewhere the revised OBR forecasts show inflation falling further but remaining some 2 percentage points above its March forecast until around 2027 keeping interest rates about 1 percentage point higher (for all durations) over the same period. That implies maintained pressure on weaker corporate balance sheets and continuing headwinds for financial institutions in generating net interest income.

Political context: Signs of the Election Elephant

There is a joke my children, when much younger, used to love: “how do you know when there’s an elephant in the fridge? You can see footprints in the butter!”

There were four pretty big footprints typical of an Election Elephant in the Autumn Statement today:

• The OBR GDP growth forecasts showed upward revisions in the near-term, downward further out.

• The reductions in National Insurance are due to take effect in January 2024 rather than the more customary April.

• Tax burden flattens out in the near-term before rising again to post war record after 2024.

• Alcohol duties have again been frozen but only until 1 August, 2024.

While those and other measures may have no intended impact on the UK general election timetable, they are clearly likely – all else equal - to provide a boost in sentiment in the near-term before waning in effect as 2024 rolls on into 2025… a serendipitous wave which politicians would be keen to ride in the approach to a general election and which seems to peak in the first half of 2024.

Since the repeal in 2022 of the Fixed-term Parliaments Act (2011) general elections can be called at any time by the government but not later than 5 years after the last election. In this case that means it must be called by 17 December 2024 at the latest – and that puts the latest possible date for the next election as 28 January 2025.

But the general view is that the two most likely periods are in Spring or Autumn of 2024. Given the “footprints in the butter” above Chancellor Hunt appears to have kept alive and maybe given the edge to a Spring election. Indeed, a general election could be called for the same day as the local and mayoral elections scheduled for 2 May 2024.

With the opposition Labour party some 20 percentage points ahead in most opinion polls those elections represent something of a known risk for the government party. But if that gap is closing in the early part of 2024, helped by the measures in today’s Autumn Statement and perhaps by further measures in the March 2024 budget, the political calculus could change very quickly.