Although we await official confirmation, both the Prime Minister and the Chancellor of the Exchequer have spoken openly about their plans for an Autumn Statement. This fiscal event will come against a backdrop of the fight against inflation, rising interest rates and, perhaps most importantly of all, the run up to the next General Election.
The government would no doubt like to go into that election with inflation falling, the economy growing and the ability to make voters feel good with some tax cuts. In this blog post, we look at the current economic and fiscal situation and assess the challenges facing the Chancellor.
£11 billion boost
The UK’s public finances data for July proved to be better than previously expected. According to figures from the Office for National Statistics (ONS), the state borrowed a total of £4.3 billion thanks to unexpectedly strong tax receipts.
July’s borrowing was the fifth highest figure since records began, according to the ONS, with the £7.7 billion spent on servicing the national debt representing a record high. The total pile of debt outstanding is equal to 98.5% of the UK’s GDP.
So far this fiscal year the government has borrowed £56.6 billion, a significant increase on last year but £11.3 billion less than the Office for Budget Responsibility (OBR) forecasts on which the Treasury bases its tax and spending policy.
The surprise extra headroom prompted calls from some Conservative MPs for tax cuts to stimulate economic growth, while others are campaigning to abolish inheritance tax (IHT).
However, Chancellor Jeremy Hunt ruled out any significant moves to lower the tax burden, which has risen to a record peacetime high and is on course to grow.
The interest the government must pay to borrow has increased significantly due to hikes in the base rate and the large volume of bonds being sold on financial markets to fund debt. This means the overall state of the public finances is likely to be worse than originally forecast despite the £11 billion boost so far this year.
Mr Hunt said:
As inflation slows, it’s vital that we don’t alter our course and continue to act responsibly with the public finances. Only by sticking to our plan will we halve inflation, grow the economy, and reduce debt.
Eyewatering pensions bill
Adding to the pressure on the public finances is a predicted major increase in the level of the state pension due to the triple lock.
The triple lock means the state pension will rise in April 2024 by the higher of CPI inflation in September 2023, with average wage growth between May to July 2023 or 2.5%.
Wage inflation was 8.2% between April to June 2023. July’s wage data is due to be released in September, but if wage inflation remains at the same level, then the state pension could rise by £869 next April to £11,469. Even if wage inflation drops, inflation is expected to rise from 6.8% in July to 7.1% in August.
Research from online investment service Interactive Investor shows that the cost of the state pension triple lock could hit an eyewatering £10 billion in 2024. This is £4 billion higher than the Department of Work and Pensions forecast in March and would push the total bill for state pensions to £138 billion.
Savers increasingly hit with tax bills
This bleak news for the public finances will not prevent calls for the Chancellor to cut taxes or unfreeze thresholds in the Autumn Statement. These calls include those asking for a higher threshold on the frozen Savings Allowance.
Individuals pay tax on interest they earn on savings that exceed the personal Savings Allowance, which currently stands at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers get no exemption and pay tax on all interest they receive.
However, rising interest rates are set to push over one million taxpayers into paying tax on their savings this tax year, according to research by investment platform AJ Bell.
In the 2023/24 tax year, it is estimated that over 2.7 million individuals will pay tax on interest, up by a million in a year. This year's predicted total includes nearly 1.4 million basic rate taxpayers, a figure that has quadrupled in just four years, AJ Bell's research found.
Whether the Chancellor has the wiggle room to keep savers with modest pots of cash out of this tax net remains to be seen.
Whatever happens this Autumn, Mercia’s tax experts will be watching and will provide detailed analysis of the government’s fiscal announcements. Keep your clients up to date with our range of digital products.