The Autumn Statement - what does it mean for business?
Where are we now? 2008 on repeat?
There has been significant turbulence in the global economy: an energy crisis sparked by the war in Ukraine, the bond market in flux, inflation in the UK soaring to over 11% - its highest rate in 40 years.
The toll this has taken to both costs to businesses and consumers has led to forecasts of recessions across the world, with the IMF predicting that ⅓ of all countries (including the UK) will be in recession next year. The Office for Budget Responsibility (OBR) forecasts that accompanied the Autumn Statement confirmed the UK is currently in recession and is expected to be so until Autumn 2023. This is largely driven by reduced consumption in response to squeezed real incomes, higher interest rates and falling house prices. Compared to the UK’s past recessions, the one currently forecast is set to be much less painful, with expected reductions in GDP forecast to be c.1/3 of those seen in 2008/9.
Figure 1: GDP reductions in previous recessions compared to current BoE/OBR forecasts
Despite a milder recession forecast, the government’s finances remain a cause for concern after record levels of spending throughout the pandemic. Estimates suggest a budget deficit of around 7.2% of GDP, place the UK as one of the worst in Europe. There are also concerns about the cost of borrowing, with both the increases in yields, alongside RPI uplifts on existing payments increasing the medium term spends on interest payments. While costs have risen, they are not as high as some headlines would suggest. The RPI uplifts, responsible for much of the quoted increases in interest payments, will not need to be paid for some time given the manner in which inflation linked debts are repaid.
Harsh, but fairer than Osborne?
With severe budgetary pressures and markets in need of reassurance after September 23rd’s ‘mini-budget’, the newspapers and commentariat were awash with suggestions that we would be returning austerity 2.0. This is not the case. While there will be a fiscal consolidation, as can be seen from figure 2 below, the approach will veer more towards increases in the tax burden than was seen after the financial crash - for example, the number of higher-rate taxpayers is likely to hit 8 million in the late 2020s, a virtual doubling within a decade.
Further, the majority of this consolidation is loaded towards the end of the current spending period in 2027/28, when growth and employment are expected to have recovered (and post a general election).
There will still be a reduction in the size of government expenditures relative to the rest of the economy. It is worth noting, however, that the economy is set to grow more quickly out of the coming recession than during the crash, meaning that in absolute terms, these reductions are less severe than they might appear at first glance. Much of this reduction will come from capital budgets, which are set to be frozen in cash terms (at £600bn per year - which is still a very significant sum), whilst day-to-day resourcing of departments will grow at 1% per annum in real terms.
Figure 2: changes in fiscal policy following the 2008 financial crash and today’s budget
There are political ramifications for these decisions. With the current budget pushing the tax burden to its highest level since the 1940s (see figure 3), many MPs on the right, including former Cabinet Minister Esther McVey, have questioned the legitimacy of the Conservative Party if it is not lowering taxes. The Finance Bill will be debated shortly and attention should be paid by party whips on the levels of dissent. Backroom deals and amendments may well be made at Committee stage given a vote against the Finance Bill is in effect a vote of no confidence in the Government.
Figure 3: Tax burden 1948-2027 (% of GDP)
Jeremy Hunt presented the fiscal measures as a ‘compassionate Conservative budget.’ From some angles this is certainly true. The tax increases, both for businesses and individuals, tend to fall more heavily on those with a greater ability to pay. Support is being provided for those most exposed by the ongoing energy crisis, in addition to some reliefs for small businesses and those firms more heavily affected by the pandemic. On the spending side, extra funds have been made available for health and education, with £8bn going to health and social care, £3.8bn on skills reform and £4.6bn for schools (core schools budget).
It is worth noting that while the fiscal tightening will be felt over the coming spending period it will be midler and offer more consideration to distributional effects than was seen under George Osborne.
However, this tightening does come after a decade of pressure on public services whose capacity was stretched further over the course of the pandemic and with many public sector workers rejecting below inflation pay offers, industrial action is entirely forseeable in the public sector.
Policy decisions: how will businesses foot the increased tax burden and where will they be protected?
Corporation Tax: “A Planned increase in the rate to 25% for companies with over £250,000 in profits.”
Verdict: For those earning above £250,000 in profits per annum, corporation tax will increase to 25% come April 2023. 70% of the UK’s firms will not be affected by this increase, with those earning lower profits being charged the ‘Small Profit Rate’ of 19%. Worth noting here is that even with the increase in the top rate, the UK is home to the lowest corporation tax rates in the G7, with France, for example, charging 33.33%.
OECD Pillar 2: “will require large UK headquartered multinational groups to pay a top-up tax where their foreign operations have an effective tax rate of less than 15%...large groups, including those operating exclusively in the UK, to pay a top-up tax where their UK operations have an effective tax rate of less than 15%.”
Verdict: For those firms or groups with significant operations in the UK, but whose organisational structure e.g. being headquartered abroad, is such that their effective corporation tax rate in the UK is less than 15%, top-up taxes will come into place on those profits. The rise will kick in on 31st December 2023. This is part of a coordinated effort across OECD member states to implement a global minimum tax rate.
Bank Corporation Tax Surcharge: “Legislated to take effect from April 2023 banks will be charged an additional 3% rate on their profits above £100 million – meaning that they will continue to pay a higher combined rate of corporation tax than most other companies.”
Verdict: In addition to the changes in overall corporation taxes, banks will see 3% added to the Bank Corporation Tax Surcharge on their profits above £100m - this compares to the current additional rate of 8%, so this represents a 5% cut. That is, on any earnings above £100m, banks will be taxed 28%. The cut in the surcharge reflects some worries that post-Brexit the City of London may become less attractive than New York or Frankfurt for example. However even with this reduction, in comparison to other major centres - Hong Kong at just 8.25% and Singapore at 17% - the UK has high corporate tax rates.
Energy Profits Levy:“will be increased by 10 percentage points to 35% and extended to the end of March 2028, and a new, temporary 45% Electricity Generator Levy will be applied on the extraordinary returns being made by electricity generators.”
Verdict: For those in the energy sector, the Energy Profits Levy has been extended until 2028 and increased to 35%, alongside the introduction of the 45% Electricity Generator Levy on profits from electricity generation which is expected to raise £14.22bn between 2022/23 and 2027/28. Politically this came as no surprise given the profits made by energy companies and the squeeze on domestic household incomes. The potential impacts on investment in these areas are uncertain. On the one hand, excess profits will not be re-investable by firms and companies do stand to benefit less from any investments they make over the short term.
However, the energy investments that really turn the dial are long term in nature. Given that there is no real expectation that this levy will be a permanent fixture, the expected value of long-term investments will be left largely unaffected and thus the incentive to undertake them and the access to finance required to make that investment, should not be so heavily affected.
The business rates package: “business rate bills in England will be updated to reflect changes in property values since the last revaluation in 2017… The business rates multipliers will be frozen in 2023-24 at 49.9 pence and 51.2 pence… Support for eligible retail, hospitality, and leisure businesses is being extended and increased from 50% to 75% business rates relief up to £110,000 per business.”
Verdict: This is an involved package, with the general headline geared towards an increase in business rates for most, but with several measures in place to provide relief to those firms with less ability to pay. With rateable values updated in order to reflect changes in property values since 2017, businesses will see an increase in what they’re expected to pay on average. The degree to which they do increase for any given business will be capped, however, at 5%, 15% and 30% for small, medium and large properties. This will protect some smaller businesses to a degree, however, the mapping of property size to ability to pay is a long way from being 1-to-1.
Some relief will be granted via the freeze of business rate multipliers in 2023/24. Were the previously planned increase to go ahead, bills would be 6% higher than with the freeze. High street businesses are likely to be disproportionately affected by business rates. It has been a tough decade for high street retailers, competing with e-commerce platforms as well being further hit by Covid-19 lockdowns. The government has clearly taken note of this, offering 75% rate relief (up to £110,000) for those in retail, hospitality and leisure. An Online Sales Tax (OST) was initially floated as a means of gaining revenue from online retail to be used to fund business rate relief. This will not be brought forward after criticism around its potential impact on consumers, as well as it disincentivising digital adoption amongst SMEs. Instead a greater burden will be placed on e-commerce distribution centres, who are set to see a 27% increase in their business rates.
Ongoing review of the R&D reliefs:“Reforms from April 1st 2023 to Research and Development (R&D) tax reliefs. The Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%, the small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. Changes will raise revenue and reduce fraud and error.”
Verdict: Prioritising R&D research for large businesses at the expense of SMEs? The overhaul plans to cut the deduction rate for the SME scheme and increase the rate of the separate R&D Expenditure Credit (RDEC). The drop in the repayment rate to 10% “is likely to be detrimental to innovative start-ups as these tax reliefs are a vital source of financing for SMEs. Without access to the cash repayment, many start-ups may struggle to secure adequate funding to progress R&D given they have limited access to other sources of finance. The scheme will also be restricted to R&D taking place in the UK – so a UK business pursuing R&D in an overseas market can’t claim relief. The increase to the RDEC tends to be used by larger businesses that are less reliant on a cash repayment as a source of financing for new R&D ventures and they will be the beneficiaries of these policy changes.
NIC threshold: “The government will fix the level at which employers start to pay Class 1 Secondary NICs for their employees (the Secondary Threshold) at £9,100 from April 2023 until April 2028.”
Verdict: businesses are to see increases in their labour costs, with the secondary threshold for NI Contributions to be frozen at £9,100. Analysis by HMRC shows that 40% of firms in the UK will be unaffected by the increase, with the heaviest impacts on larger employers.
Consumption and property taxes
Vehicle Excise Duty: “The government will introduce a taxon electric cars - vans and motorcycles from April 2025. This will ensure that all motorists begin to pay a fairer tax contribution.”
Verdict: Fair? This is where the rubber hits the road! One can see why the government is increasing tax on electric vehicles as their numbers and popularity continue to grow. This a short term measure to raise revenue but the question is how electric vehicles are going to be taxed in the long run. Fuel duty charged at the pumps raises the bulk of about £35bn in motoring taxes for the Treasury, but that figure is forecast to drop sharply with the transition to electric cars. This is another tax and is seen as punitive as it is a disincentive for people trying to do the right thing. This will undoubtedly slow the transition to electric vechiles. Conventional petrol and diesel cars and vans are set to be banned from sale in the UK in 2030, perhaps we can envisage that target being removed and it will be interesting to see how the automotive manufacturers respond in terms of long term investments in electric vehicle technologies and battery research and production in the UK.
Stamp Duty Land Tax cuts: “On 23 September, the government increased the nil-rate threshold of Stamp Duty Land Tax (SDLT) from £125,000 to £250,000 for all purchasers of residential property in England and Northern Ireland and increased the nil-rate threshold paid by first-time buyers from £300,000 to £425,000. This will now be a temporary SDLT reduction.”
Verdict: The SDLT cut will remain in place until 31 March 2025. The announcement has been made more than two years ahead of the change. This is likely to cause stress for those buying closer to the deadline as they race to complete their transaction. According to the Land Registry, house prices rose by 9.5% year-on-year in September, but there are clear signs that the market is beginning to slow down as borrowers face surging costs due to everyday inflationary pressures and the rising cost of mortgage products, particularly fixed rate 2 year mortgages over the past two months. On a more encouraging note, this week the average five year fixed rate mortgage dropped below 6%, the lowest since the initial spike from the shockwaves caused by the September mini budget.
News on big Infrastructure
Transport schemes: “The Autumn Statement recommits to the government’s transformative growth plans for our railways. These include East West Rail, core Northern Powerhouse Rail, and High Speed 2 to Manchester.“
Verdict: The mention of the above schemes will provide reassurance to many in transport, logistics and construction who have put significant resources into their planning and development. In addition to these reassurances, the Chancellor announced that the delivery of these projects will be sped up through updates to National Policy Statements for Transport, Energy and Water Resources during 2023 and via a yet-to-be announced ‘suite of sector-specific interventions’. These schemes will be prioritised instead of those marked out for acceleration in September 23rd’s Growth Plan. It was apparent, however, that several major infrastructure projects were not mentioned in the budget, including the Eastern branch of the HS2 project (likely binned), the Lower Thames Crossing and the A303 Stonehenge Tunnel.
It’s worth noting here that the majority of the talk in the budget on larger scale infrastructure projects, in terms of energy and digital as well, was more focussed on the re-commitment of government to existing schemes and initiatives, such as the planned opening of Sizewell C, as opposed to including the announcement of anything truly new.
UK Infrastructure Bank - “will be placed on a statutory footing. This will cement its status as a key institution that will facilitate long-term investment.”
Verdict: Hardly a surprise given a Bill to make provision about the bank (based in Leeds), which started in the Lords, is currently at Report Stage in the House of Commons. According to the OBR the scale of the bank’s operations amounts to 0.1% of GDP per year. The German equivalent has total assets totallying 14% of GDP. The Bill will hand the bank operational independence, establish a governance structure and enable the bank to lend to the public and private sector, including local authorities, particularly around projects tackling climate change. It is an institution that further complements the Government’s promise to level up.
Levelling-up, local policy and devolution
Devolution deals with Greater Manchester and the West Midlands Combined Authorities: “The government is in discussion with the mayors of these areas to devolve powers to deliver levelling up in areas such as skills, transport and housing by early 2023. They have the potential to provide single departmental-style settlements at the next Spending Review.”
Verdict: This could provide mayors with accountability over key economic growth funds, moving away from competitive bidding processes, however spending reviews have changed in recent years due to Covid-19 but the 2021 review covered the period 2022-23 to 2024-25. In effect this decision is pushed to beyond the next general election. The announcement has been welcomed by the Metro Mayors as it would provide them with a block grant similar to Scotland and Wales and with legislated authority powers over housing, skills and transport. It provides significant opportunities for business in terms of competitive bidding on regional projects.
Levelling-up Fund: “the Autumn Statement confirms that the second round of the Levelling Up Fund will allocate at least £1.7 billion to priority local infrastructure projects.”
Verdict: Talk around the Levelling Up agenda has been notably quiet over the past couple of months. The announcement of the second round of funding will be of great reassurance to those councils who have spent the significant time and resources required to submit bid. The winning bids should be announced before the end of the year (we understand that to be first half of December).
Investment Zones: “The Department for Levelling Up, Housing and Communities will work closely with mayors, devolved administrations, local authorities, businesses and other local partners to consider how best to identify and support highest potential knowledge- intensive growth clusters, driving growth while maintaining high environmental standards.”
Verdict: The government has totally re-focucussed this programme, a policy decision prioritised by former PM, Lizz Truss. The first clusters will be announced February/March 2023. The existing expressions of interest submitted will therefore not be taken forward. However, rebellion is in the air as on Monday next week MPs were due to vote on the Levelling Up Bill. A key amendment has been laid by more than 40 Conservative backbenchers who supported a series of amendments to the Bill proposed by former Environment Secretary, Theresa Villiers, that would ban councils from taking housing targets into account when deciding on planning applications. The amendments would bring wholesale changes to the planning system, including making it easier for councils to ban building on greenfield land and providing more incentives to develop brownfield sites. Targeted by backers of the ammendments are what is referred to as the ‘building cartel’ of developers and house builders who they accuse of having permission to build houses but are failing to do so. Shadow DHLUC Secretary, Lisa Nandy, has already gone on the offensive, stating her opposition to the amendments, questioning the commitment of the Government’s Levelling Up agenda as the amendments ‘scrap housing targets’ at a time of limited supply and increasing demand. Arbitration between DHLUC and the house building industry may well be required!
Markets and growth
Bringing forward the Digital Markets, Competition and Consumer Bill
Verdict: A key supply side growth measure, the Bill was initially announced in the Queen's Speech in May 2022 and will now be brought forward early next year. The government's digital markets strategy includes tailored codes of conduct for certain digital companies and a bespoke merger control regime for designated firms will be covered in the BIll. There will be a yet defined minimum revenue threshold to exempt smaller companies. The CMA will be able to designate companies as having Strategic Market Status (SMS). Only companies found to have "entrenched" market power in at least one digital activity will be designated. SMS companies will be required to report their most significant transactions.
Merger Controls - The Bill proposes amendments to the CMA's jurisdiction to review mergers. In particular, increasing the turnover threshold from £70 million to £100 million; introducing a new threshold designed to capture so-called "killer acquisitions" which in effect prevents tech giants from being able to buy up startups or smaller rivals with the intention of shuttering a competing service.
Market Regime Powers - Proposed changes include greater flexibility for the CMA to define the scope of market investigations; granting the CMA the ability to accept binding undertakings at any stage during the market study / investigation process and removing the requirement to consult on a market investigation reference within the first six months of a market study.
Solvency II: “government has today published a consultation response setting out the final reforms of Solvency II. These reforms will unlock tens of billions of pounds for investment across a range of sectors.”
Verdict: Solvency II is a legacy set of EU regulations aiming to ensure ‘prudent practices’ amongst insurance funds. But they have come under fire (including from the Governor of the Bank of England) for stimying investment into longer-term assets such as infrastructure. The decision comes after a compromise deal between HMG and the Bank of England, who were previously embroiled in conflict over what the proposed reform package would mean for the independence of financial regulators.
Included in the package is a proposed reduction to the ‘Risk Margin’ by 65% for life insurers and 30% for non-life insurers and a broadening of the asset and liability eligibility criteria for the ‘Matching Adjustment’, all of which have been welcomed by the Association of British Insurers. With British Insurers sitting on almost £2tn in investable funds, the reforms have the potential to unlock investment of approximately £100bn over the next ten years for infrastructure and green energy supply - assisting the transition to net zero.
It’s review time (again) and some old faces are back too
Sir Michael Barber, former adviser to Tony Blair on school standards, has been tasked to advise the chancellor and the Secretary of State for Education, Giliian Keegan, on the Government’s skills reform programme. The chancellor emphasised the importance of skills in driving long-term economic growth and Sir Michael will advise on taking forward major reforms set out in the Skills for Jobs White Paper published in January 2021- like delivering T Levels and introducing the Lifelong Loan Entitlement from 2025. These are key priorities for the Education Secretary. Although this is a focussed inward looking review, Sir Michael will be advising ministers directly, there will undoubtedley be scope to feed into his review and engage with the review team.
Sir Patrick Vallance, the outgoing Government Chief Scientific Adviser, is tasked with leading a new stream of work to consider how the UK can better regulate emerging technologies and enable their rapid and safe introduction. He will focus his efforts on five growth industries: digital technology, life sciences, green industries, financial services and advanced manufacturing. Business engagement will be important to shape the scope and policy outcomes of the review. This could signal an influx of new measures and investment to support the growth of the above sectors, as well providing an opportunity to shape their direction of travel.
Patricia Hewitt, former Health Secretary in the Blair government, will lead an independent review of integrated care systems (ICSs) to empower local boards and leaders to focus on improving outcomes for their populations. With less national targets, greater control and more accountability for performance and spending all on the table, this could be an opportunity for more targeted interventions from the healthcare industry working with local ICSs. The review will focus on improving health outcomes and reducing health inequalities and there is likely scope for introducing partnerships between business, local government, social enterprises and the NHS on a range of pilot projects. Hewitt is currently chair of a local health board in Norfolk.
