We are boxed in by bonds and the chancellor’s promises

Jeremy Hunt set out to achieve three overriding but conflicting goals as he presented his 2023 autumn statement last month. The obvious takeaway was the rabbit from the hat, the unexpectedly high cuts in national insurance rates, which highlighted that his immediate and most important objective was to create election-winning momentum.

By contrast, a blizzard of incremental business-friendly measures, including the extension of full expensing, demonstrated the limited resources available to the UK to drive growth. Finally, an improbable projection of tight growth in spending, right through to 2028/29, aimed to keep the bond markets on side by demonstrating ruthless fiscal discipline.

There has been plenty of mostly negative debate on the impacts on our sector

An argument has raged over whether these were the right priorities, and whether they can succeed. Equally, there has been plenty of mostly negative debate on the impacts on our sector. I have been pondering this since the day of the announcement.

In my immediate reaction on LinkedIn, I wrote that this was a statement where “you had to read the small print”. I have gone through the documents since and have not changed my mind, although it is fair to say that Hunt did achieve one further goal on delivering his speech – it has not unravelled, and his status as a Teflon-coated chancellor remains intact.

He has also proved to be very effective at spin. According to the Office for Budget Responsibility (OBR), measures announced in the spring Budget and autumn statement represent two out of the four most generous packages of fiscal loosening since the great financial crisis.

The other two occurred during the covid-19 crisis. However, the tax burden is still on track to reach a postwar high of 37.7% by 2028/29. Much of this expenditure, including expanded childcare, represents an investment in supply-side capacity – but in practice it will be paid for through future taxes rather than through a downpayment today.

The Conservatives may be lagging behind in the polls, but it is fair to observe that the autumn statement has at least kept them in the game

Turning to the chancellor’s first goal, the Conservatives may be lagging behind in the polls, but it is fair to observe that the autumn statement has at least kept them in the game. But this is an expensive gambit.

The cost of the reduction in national insurance will be an eye-watering £36bn between next year and 2028/29, and other than providing a marginal cut in the tax burden for working people, it is not clear whether the measure will help to bring more people back into work or will attract more voters next year.

However, as widely observed, the true impact of the tax cut is to set the battle lines for the forthcoming election. Labour have supported the change to NI in votes for the Finance Bill. Everyone is more boxed-in.

Many of Hunt’s supply-side initiatives are also likely to prove enduring, mainly because they help to lay the foundations for UK growth, which of course remains stubbornly low. A good example is planning reform, which all parties are in favour of, but which is notoriously difficult to deliver. Thankfully a lot of progress is now being made.

Many of the 100-plus measures announced alongside the statement involve planning reform, including qualified support for many recommendations in the National Infrastructure Commission’s recent review of the Development Consent Order process. The watch-out here is that, given a lot of the leg work has been done, future leverage through planning reform will diminish. 

Bets on the transformative power of more planning changes should be taken with a pinch of salt – even as current and planned reforms grind on.

Looking at the growth challenge, it will act as one of the big dividing lines between the main parties next year. Regardless of the sums involved, Labour’s climate investment pledge aims to crowd in private investment along the lines of the Inflation Reduction Act in the US.

Conservatives argue that the UK cannot afford to compete in a subsidy war against the US and eurozone and has to rely on more granular reforms to taxes and labour markets to attract footloose international investment. Setting aside other measures that help to attract investment, like political and policy stability, Hunt has clearly set out this aspect of the Conservative growth model – with further incentives focused on investment and expanding the workforce.

Unfortunately, the autumn statement highlights just how hard it will be to turn growth back on. All of the pro-growth measures outlined this statement and the spring Budget are forecast to add about 0.5% to potential GDP each year from 2025 onwards – that’s about £12bn a year in today’s money. It is a lot, but is it enough to shift the UK’s growth, income and public spending dials?

For sectors such as construction who are invested in a well-funded and resilient public sector, the autumn statement has introduced a lot of uncertainty

This neatly brings me to the chancellor’s final test – the need to keep investors on side by demonstrating fiscal prudence. Bond markets barely moved in response to a £20bn tax cut, suggesting a job well done on their terms.

Hunt’s economic model prioritises tax cuts over the creation of headroom for future spending. He argues that the right long-term choices are to reward hard work and to incentivise private sector investment. However, for sectors such as construction who are invested in a well-funded and resilient public sector, the autumn statement has introduced a lot of uncertainty with respect to future funding.

Latest Institute for Fiscal Studies (IFS) analysis states that, based on latest spending projections to 2028/29, unprotected government departments including local government, further education and prisons will start to see year-on-year real terms spending cuts of at least 2% per year from 2024/25 onwards.

Similarly, the chancellor’s decision to freeze capital spending in cash terms could see public sector net investment, as a percentage of national income, fall back to levels not seen since the early 2000s. The IFS adds that even Labour’s proposed extra investment will not stop a significant reduction from current levels of spend.

Whether these spending plans are plausible or not, they are part of the deal that makes the UK investible. Long-term measures like cuts to NI and the confirmation of full expensing as announced in the Budget also reduce room for manoeuvre.

Looking forward, growth may increase and borrowing costs may fall, creating further headroom. However, for the foreseeable future, the government and its suppliers will increasingly find themselves boxed in by bond markets and by autumn statement promises.

Simon Rawlinson is a partner at Arcadis