What to Glean From the UK’s Ho-Hum Autumn Statement

Editors’ Note: MarketMinder favors no politician nor any political party, assessing developments solely for their potential market and economic impact.

Last Thursday, the UK’s fiscal drama took another turn as Chancellor of the Exchequer Jeremy Hunt delivered the widely watched Autumn Statement. After the recent fireworks when former Prime Minister Liz Truss’s chancellor, Kwasi Kwarteng, announced a plan including allegedly irresponsible “unfunded” tax cuts and a plan to aid households struggling with high energy bills, Hunt had promised to take tough “austere” actions aiming to fill a hole forecasted to hit the UK government’s finances in the coming years. Still, some expected market fallout, but they got very, very little. That predictably led to claims he had successfully assuaged markets, but we think that is personality politics, not analysis. In our view, the answer is much simpler: Hunt’s plan can best be described as a package of rather meager tax hikes and the usual not-so-austere slower pace of spending growth. It seems more likely to us the market’s big collective yawn was related to the sheer lack of anything surprising in this budget. We think the more telling thing about this plan—and the analysis around it—is just what it shows about sentiment toward the UK economy today.

First, here are the particulars of the new fiscal plan, which replaced the mini-budget, which amended the budget, all in a matter of a few months.

Tax Measures:

• 45% top bracket remains, but the threshold drops from £150,000 to £125,140
• Freezes at current nominal levels the thresholds for personal allowances, higher rates, NHS taxes and the inheritance tax for two additional years—to April 2028.
• Dividend taxes will kick in at £1,000 versus £2,000 in 2023, then £500 in 2024.
• The amounts exempted from capital gains also fall from £12,300 this year to £6,000 next and £3,000 in 2024.
• Windfall tax on oil and gas companies will rise to 35% from 25% and a new 45% tax will hit renewable and nuclear power utilities through March 2028
• A one-year extension of energy price caps
• Freezes the sales threshold for small businesses to pay VAT
• Excise tax exemption for electric vehicles will end in 2025

Spending:

• Cuts foreign aid from 0.7% of GDP to 0.5%
• Increases funding for education and the National Health Service
• Increases minimum wage
• Slows the rate of spending growth

So where Kwarteng’s plan aimed to boost growth by partially offsetting inflation’s impact on tax-bracket creep, Hunt’s doubles down—freezing brackets longer and even cutting the top threshold. The scope of this isn’t gigantic, but it is notable that the two plans move in almost exactly opposite directions.

One thing Hunt did do that Kwarteng didn’t—to the chagrin of many—was seek analysis of his plans from the non-partisan Office for Budget Responsibility (OBR). And this is where this proposal gets (somewhat) interesting. The OBR drew many eyeballs by declaring the UK in a recession that would likely run through early 2024. Now, mind you, the OBR isn’t the official arbiter of UK recessions (there isn’t one) and all this amounts to is a forecast. Perhaps a UK recession does loom—we see that as very possible. Perhaps it indeed began with Q3’s GDP decline, as the OBR anticipates. Yet pundits left and right latched onto the OBR’s forecast and started touting not only recession outlooks, but long recession.

Most takes on the budget and all matters surrounding it are politicized—on party lines, pro-Brexit vs. anti-Brexit lines or even those invested in particular personalities within the Conservative Party. Set it all aside. As we showed you mere weeks ago, the UK doesn’t have a debt problem, fiscal “hole” tied to inflation aid notwithstanding. Hunt’s allegedly “tough” choices in small and mostly 2024 tax hikes and a slower pace of spending growth may be a minor economic headwind, but that is about it. Bear in mind, too, that the last time the UK tried this brand of austerity, spending routinely rose more than the initial plans as the government kept kicking the can. Fiscal policy is always subject to change. It may be particularly so in the UK, where the next general election is due by January 2025, setting up some wonderful political timing if the government decides to cancel some of those 2024 tax hikes at the last minute.

The key thing we glean from the widespread attention heaped on a pretty boring budget announcement is this: All the hoopla around it, the recession forecast and the discussion of what is good and bad for markets really shows you how dour people are toward the UK economy. While it may be hard to appreciate in the here and now, that dour sentiment suggests reality shouldn’t have too tough of a time delivering positive surprise.