Autumn Statement Commentary by Worldwide's Investment Director Martyn Page
November 18, 2022
BY Martyn Page, Investment Director, Worldwide Financial Planning
LIKE the classroom bully who deliberately instils fear by telling you in advance how he’s going to get you after school, the government has spent the past week leaking tax rises via the media. This wasn’t just to soften up the public for bad news. Like the Chancellor’s ‘Autumn Statement’ it was aimed fairly and squarely at global bond markets. The chancellor wanted to ensure bond markets got no unexpected nasty surprises when he spoke. And they didn’t.
Although remote from many lives, this really matters because the future path of borrowing costs determines the debt interest that has to be paid (currently £100billion a year). In turn this affects the value of the pound, inflation and our future standard of living.
Since the leaks began, the country’s cost of borrowing has come down from 3.5 per cent to 3.2 per cent, which is roughly back to where it was in mid-September a week before the debacle needlessly created by that short-lived hubristic power couple, Truss and Kwarteng. The pound has recovered too. But it will take a lot longer for the economy and our standard of living to recover.
Like taking your car for an MOT test, the government annually submits five-year plans for taxing and spending to the Office of Budget Responsibility (OBR) – an independent fiscal watchdog. The OBR makes economic forecasts and then weighs up government performance against its stated tax and spend plans. It was important that the chancellor’s plans passed this test – which they did. Just. However, please note that just because the OBR is independent doesn’t mean that its forecasts are any better (or worse) than other forecasting bodies.
The chancellor intends to raise £55billion over the next five years to be split evenly between higher taxes and lower public spending. However, much of this pain has been backloaded to 2027 and 2028. This is pragmatic economically because we all need to get through the current recession, and politically because the next election cannot happen later than January 2025. Stamp duty cuts on house purchases will be extended to the end of March 2025. This might provide a fillip to the housing market in the run up to the next election. Stranger things have been known.
A lot of the tax will be raised by stealth – by simply freezing the personal allowance, national insurance thresholds and basic/higher rate income tax bands for an additional two years, ie to April 2028. This will bite increasingly as the years go by and is set to raise £6.8billion for the Treasury by the end of 2027.
For those fortunate enough to have dividend income or the prospect of capital gains, the dividend tax allowance falls from the current £2,000 to £1,000 next April and then to £500 from April 2024. The allowance for capital gains falls from the current £12,300 to £6,000 next April and then to £3,000 from April 2024. If you were ever in doubt about using your ISA allowance, the playing field just got a whole lot more unlevel. Married couples might wish to take another look at how they apportion their assets. If in doubt please consult an independent financial adviser.
Three things have held back the UK economy: energy prices, inflation and market interest rates - the higher than necessary borrowing costs suffered by the government and many mortgage holders because of the unfunded mini-Budget. This last factor has now been reversed, but it will take time for the country to fully regain its credibility with the lenders on whom it depends. However, because the country is carrying a much higher burden of debt relative to its economic size, it is now much more sensitive to changes in market interest rates than before. For better or for worse.
Energy prices are sky high in part because Putin is punishing western Europe for its aid to Ukraine. All the forecasts assume energy costs will remain high. But that could change – we simply don’t know. Meanwhile the Energy Guarantee Scheme due to end next April has now been extended for a further year. The Chancellor was right to remove this uncertainty. But he has also raised the amount we will have to pay towards these bills. That said, we are now insulated from the even larger bills we would otherwise have paid.
The UK is likely four months into a recession currently expected to last for much of next year, so the extension to April 2024 helps to soften the blow. The Energy Price Guarantee means that inflation is now expected to peak 2.5 per cent lower than otherwise and three months earlier too – perhaps by Christmas. The government can change who pays for these higher energy costs within and between generations but it cannot make them go away.
If we strip out highly volatile energy and food prices, and look at the more reliable figure of ‘core inflation’, we find it is currently running between five per cent and six per cent in the UK, Europe and US. That’s likely a result of Covid where a strong recovery in demand for goods and services could not be matched by supply because those supply chains have been gummed up. As such, it is not a political failing. As supply chains continue to normalise and consumers ability to spend reduces, we should see core inflation fall back, too. Coincidentally, the pay rises currently reported by the private sector are also running at around six per cent due to labour shortages.
That six per cent is, of course, well below the current inflation rate of around 11 per cent. By continuing the freeze on personal allowances and tax bands for the next several years, more of people’s sub-inflationary pay rises will be clawed back in tax. According to the OBR this drives historically large falls in per person real disposable incomes, which drop by a cumulative seven per cent over the two financial years to 2023-24, wiping out the last eight years of improvement.
The outlook for inflation – according to the OBR’s forecast will be of interest to anyone with a mortgage. According to the chart below, by the summer of 2024 the OBR sees inflation being negative for 2-3 years. Think about that.
Remember that the Bank of England has an inflation target of two per cent. Earlier this month the Bank forecast that if interest rates remained unchanged at today’s three per cent although the economy might face five quarters of recession due to higher mortgage and energy costs, the inflation rate would be around its two per cent target at the end of the standard two-year forecasting window.
Contrast that with the inflation rate forecast by the OBR and there is space for the Bank to begin cutting interest rates – and perhaps sooner than is currently expected. If there is a straw to grasp at, it is that market interest rates could soon start to fall. If commercial banks pass that on to borrowers, then those whose fixed-rate mortgage deals are coming to an end may not have to suffer the frankly unaffordable deals in the marketplace just over six weeks ago.
Most two-year fixed rate deals are priced off the government’s own cost of borrowing and this could change quite rapidly. We would therefore urge anyone whose mortgage deal is approaching its end date – by which we mean six months or so – to not just accept what their bank offers. Please contact an independent mortgage broker who will be able to advise you of various short-term strategies you might consider as well as more alternatives that any high street bank.
What was missing from the Autumn Statement? Pubs, restaurants and hotels cannot find enough staff – even when they have offered higher wages. Brexit apart, Covid-19 has created thousands of people too unwell to currently return to work. This immediate and pressing matter is of particular importance to areas reliant on tourism. But there was no relaxation of visa rules nor plans to encourage the economically inactive back to work in the Chancellor’s statement. Maybe this is something Cornwall’s soon-to-be elected new mayor can petition for.
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Martyn Page is the Investment Director of Independent Financial Adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.