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Despite largely confirming pre-announcement expectations, the UK Chancellor has managed to find some cash for a giveaway with a surprise 2% cut to national insurance, making today’s Autumn Statement somewhat more generous than many had initially anticipated.
Whilst a cut to national insurance had been widely expected and has a relatively small impact on household finances, today’s larger than expected 2% cut is still modestly inflationary at the margin, further supporting our view that the Bank of England will need to hold rates higher for longer than DM peers. Even so, at first glance Chancellor Hunt appears to have threaded the needle in balancing market demands for fiscal discipline and inflationary risks against the political impetus to support consumers and growth, with markets remaining relatively calm following the event. Short-end gilt yields found temporary support and the pound retreated off intraday highs, though both moves were marginal with US jobless claims data ultimately proving more impactful for markets by comparison.
With the market reaction to the disastrous mini-budget just over a year ago still fresh in the minds of many within the market, and a general election looming, many including ourselves had expected the Chancellor to keep his powder dry in preparation for a more generous round of spending commitments next year.
That said, the most significant development since the Budget last March has been the extent to which fiscal drag has impacted the government’s expected tax take. Whilst back then the headroom under the Chancellor’s fiscal rules amounted to just £6.5bn, the combination of high inflation and fixed tax thresholds had seen expected government revenues rise significantly heading into today’s announcement. Though this has been partially offset by a slowdown in growth and increase in expected interest payments with rates projected to stay at elevated levels, risks remained that the Chancellor chose to spend some of this windfall earlier than expected, a prospect that he delivered on in today’s statement.
In terms of major announcements, the Government will increase Universal Credit and other benefits by 6.7% in line with September’s inflation figure, as opposed to the lower 4.7% number seen in October which had been hinted at by some as a cost saving measure. The government similarly retained the pension triple lock in full, increasing the state pension in line with headline average weekly earnings and not the lower ex-bonus measure, meaning that from April 2024 the full state pension will increase by 8.5% to £220 per week. The Living Wage was uprated too, in this case by 9.8% to £11.44 per hour. The Chancellor managed to keep the best for last, however, rounding off the Autumn Statement with a 2% cut to employee national insurance, with only a 1% decrease in contributions being expected by analysts.
Given the measures announced to support household finances, especially at the lower end of the income distribution, today’s budget does provide a slight boost to underlying inflation pressures. However, we think it will have a moderate impact over the coming months, resulting in a partially slower easing cycle from the BoE as opposed to raising the risk of further rate hikes.
That said, it is arguable that the latest round of tax giveaways only serves to offset the impact of greater than expected fiscal drag, a view seemingly taken by the OBR. Indeed, their projections accompanying today’s statement show inflation hitting 2.8% by the end of 2024 and returning to the Bank of England’s 2.0% target in 2025. Moreover, they also see the economy growing by 0.6% this year and 0.7% in 2024, before delivering expansions of 1.4%, 1.9% and 2% in 2025, 2026 and 2027 respectively. This is considerably more optimistic than private forecasters and the BoE over the next 3 years, something that has been a notable feature of other recent OBR projections. Nonetheless, this also reflects the impact of several additional announcements included in today’s Autumn Statement. Most significantly, the Chancellor announced that full expensing of business investment would now be made permanent, having previously been a temporary measure with a significant overhaul of disability benefits was also unveiled in an effort to expand the labour force. All in all then, the OBR projects only a modest increase in inflationary pressures, with aggregate demand increasing by 0.1% relative to supply at the peak of its impact in 2025-26, whilst retaining a comparatively optimistic growth outlook.
All told, today’s fiscal announcement does little to materially alter the outlook for sterling and Bank Rate over the coming twelve months. This falls largely in line with our expectations, but it was notable that headlines since the weekend had suggested more active fiscal policy. With the risk of more expansionary fiscal policy now cleared for markets, the focus shifts towards the nation’s current economic health with November’s flash PMIs due tomorrow morning.
Author:
Nick Rees, FX Market Analyst