From education to employment

Hunt combines George Osborne rhetoric and Gordon Brown policy, announcing energy support today and tougher times tomorrow with top-heavy tax rises and backloaded spending cuts

Torsten Bell

The Chancellor has responded to a grim economic outlook with renewed energy support next year and a backloaded fiscal tightening, combining huge stealth tax rises with far less concrete spending cuts, the Resolution Foundation said on Thursday.

The Office for Budget Responsibility (OBR) forecasts combine an energy shock driven recession – unemployment is set to rise by 500,000 and the economy to be no larger at the end of this parliament than at its start – with fast rising debt interest costs, leaving borrowing £270 billion cumulatively higher over the coming five years than was expected to be in March.

In the short term the Chancellor has confirmed plans for more support for household energy bills next year, combining a repeat of Sunak’s lump sum payments for vulnerable groups and a less generous form of Truss’ price ceiling, which will see a typical bill rise to £3,000 next April. The latter may make little difference to energy bills next year overall because they are currently set to average £3,300.

Energy specific support will therefore be less generous next year, but more progressive. The reliance on the benefits system, as the £400 bill reduction and council tax rebate policies come to an end, means two-thirds of next year’s energy bill support will go to the poorest half of households, compared to half of the support this year.

The biggest losers next year will be high energy users on middle and higher incomes – with almost one-quarter (23 per cent) of households facing bills of over £4,000 next year – though many on lower incomes will see huge bill increases too. The Chancellor has doubled down on a huge cliff-edge in support with those on means-tested benefits receiving payments totalling £900, while those earning £1 too much to qualify for those benefits receive nothing.

The Foundation notes that four-in-ten (or 2.3 million) households of the poorest fifth of households do not receive means-tested benefits. For example, a single adult earning £20,000 a year, living alone, and not on benefits, could see a rise in their annual energy bill of £1,930 compared to 2021-22 – equivalent to a 11 per cent loss in post-tax income.

Looking further ahead the Chancellor announced a £55 billion a year fiscal tightening in order to meet his loosened fiscal target of getting debt falling as a share of GDP by the end of the forecast period (2027-28). This means the UK has gone from the biggest tax cuts in 50 years to the biggest fiscal tightening since 2010 in just a few weeks.

The net fiscal tightening announced since the spring is focused on spending cuts. The £25 billion of tax rises announced today – including reducing the amounts people can make before paying capital gains tax, dividend tax, and the 45p rate of tax – largely just reverse the remaining £18 billion of tax cuts from Liz Truss’ tenure.

However, the overall fiscal consolidation announced since the pandemic is much more tax heavy, with Chancellors since then raising taxes by 2.4 per cent of GDP, including freezing all major tax thresholds during the current period of high inflation and sharply increasing corporation tax. This is in sharp contrast to the post-financial crisis fiscal consolidation in 2010, almost 80 per cent of which came from spending cuts.

Looking at the package of tax rises coming into effect over the course of the parliament, the Foundation notes that the typical household will see their annual tax bills rise by £1,700 (or 3 per cent of their income). The richest tenth of households will see the largest tax rises in cash terms – around £4,300 (also 3 per cent of income).

Tax as a share of GDP is rising steeply, reaching 37.5 per cent by 2024-25, its highest level since the Second World War. While public spending as a share of GDP rises to 43.4 per cent in 2027-28, that reflects fast-rising debt interest costs offsetting significant cuts to investment and public service spending pencilled in from 2025-26, after the next general election.

A £22 billion reduction in day-to-day public services, combined with existing protections for health, defence and education, imply cuts to unprotected departments like transport, policing and local government of around 0.8 per cent per year between 2024-25 and 2027-28.

This will take real per capita spending for these departments back to the level they were at in 2014-15, and are likely to be undeliverable given they would require years of holding down public sector wages below those in the private sector, notes the Foundation.

Whether spending cuts on this scale come to be implemented will depend on whether the economy performs as badly, and crucially debt interest costs rise as fast, as forecast. But while the UK’s economic outlook is highly uncertain, the outlook for living standards is certainly bleak.

Average real household disposable incomes are forecast to fall by 7.1 per cent over this year and next – equivalent to a £1,700 fall per household – by which time average incomes will have fallen back to 2014 levels.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“Today Jeremy Hunt delivered an Autumn Statement that combined the rhetoric of George Osborne and the policies of Gordon Brown. 

“In the short-term, the Chancellor has announced a smaller but more progressive energy support package, with two thirds going to the poorest half of households. But there will still plenty of rough justice – particularly for the 2.3 million low-income households who don’t receive means-tested benefits and therefore don’t qualify for lump-sum payments.

“The Chancellor announced concrete and big tax rises, disproportionately hitting middle and higher income households, while significant spending cuts were only pencilled in for after the next election and are unlikely to be delivered on the scale envisaged.

“Stepping back, the UK government has gone from announcing the biggest tax cuts in 50 years to the biggest tightening since 2010 in just a few weeks. Today provided the more reality-based version – but that reality will feel very tough indeed, as unemployment and energy bills rise, while average incomes fall by £1,700 over this year and next.”

  • The Foundation uses Cornwall Insight’s latest energy bills forecast and makes no assumption about any behavioural change to energy use.
  • The Resolution Foundation’s overnight analysis of the Autumn Statement 2022 and OBR Economic and Fiscal Outlook will be published at around 8am tomorrow, and the launch event with OBR Chair Richard Hughes will start at 9am. Register here if you’d like to attend, or watch online.

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