Our view on the Autumn Budget
Here's a brief overview of the key points from today's Autumn Statement. Our thanks to our partners at Charles Stanley for their help in pulling this together.
Chancellor of the Exchequer Rishi Sunak unveiled his latest plans for the nation’s public finances today, focused on a sustained post-pandemic economic rebuild. He urged that the UK is entering a “new age of optimism” as upgraded growth forecasts and less Covid ‘scarring’ than feared gave him more room for manoeuvre.
The Office of Budget Responsibility (OBR) lowered its estimate of the negative impact of the pandemic on GDP to 2% from a 3% hit, and with a milder effect its projection of national debt also moderated, now expected to peak a bit lower at 85.7% in 2023/4.
There was, however, acknowledgment of the rising challenge of inflation, with the Chancellor noting that CPI inflation is expected to average around 4% over the next year. Much of this he put down to supply bottlenecks and a surge in demand for energy, but even so it seemed a little at odds with the soothing ‘transitory’ narrative emitting from the Bank of England.
To help combat a potential ‘cost of living crisis’, there was support for households through a cut to the universal credit taper rate that has the effect of claimants losing some of their benefits if they earn more money. The rise in the National Living Wage to £9.50 an hour was widely reported in the lead up to Budget day and is also targeted at helping lower income individuals. In addition, there will be an end to the public sector pay freeze.
From a personal finance perspective, Mr Sunak’s third budget contained little we didn’t already know or suspect. The big changes to taxes – the increase in tax on dividend income and a rise in National Insurance contributions from April next year to provide more money for social care – were announced in September.
The government had also previously confirmed a year’s suspension if the so-called ‘triple lock’ on state pensions. Normally, this guarantees payments increase annually by the higher of inflation, average wage growth or 2.5%, but a furlough-related anomaly saw the wage element dropped. The Budget earlier this year in March was also tax-focused, with a four-year freeze on income tax bands, essentially representing a tax hike as wages rise, and an announcement that corporation tax would rise significantly from 19% to 25% in 2023.
Although nothing really headline-grabbing came out, a quiet Budget doesn't mean an insignificant one. Better public finances might have represented an opportunity to renege on tax rises or allowance freezes previously set out, or to cut VAT, especially with inflation increasingly bearing down on household finances. However, for the usual areas subject to the pre-Budget rumour mill such as inheritance tax, pensions and Capital Gains Tax it’s a case of ‘as you were’. There were also no changes to ISA or pension limits.
With the climate crisis escalating, and COP26, the international climate summit in Glasgow, just around the corner, it was widely anticipated that a portion of the Chancellor’s announcements would be focused on support for green infrastructure. However, there was relatively little on this during the speech, and with the government keen to prove its green credentials going into the summit, a continued freeze on fuel duty and a cut to air passenger duty on regional routes raised a few eyebrows, albeit far flung destinations will see higher duty.
In terms of market moves, the pound sold off very marginally into the Budget announcement but ended up retracing much of this. Gilts rallied during the day, most of this being pre Budget, and particularly in respect of longer dated issues, with investors perhaps taking heart from the improved economic projections from the OBR. There was little reaction in share markets, although pub companies got a boost from a cut to duty on draft beer and cider. There was also good news for some smaller companies more broadly with a reduction in business rates of up to 50% for retail leisure and hospitality for a year.