Budgets & fiscal events

Economy and public finances

Help today, squeeze tomorrow

Putting the 2022 Autumn Statement in context

18 November 2022

Torsten Bell

Mike Brewer

Molly Broome

Nye Cominetti

Adam Corlett

Emily Fry

Sophie Hale

Karl Handscomb

Jack Leslie

Jonathan Marshall

Charlie McCurdy

Krishan Shah

James Smith

Greg Thwaites

Lalitha Try

This report provides Resolution Foundation’s overnight analysis of the 2022 Autumn Statement.

Yesterday, Jeremy Hunt delivered an Autumn Statement that combined the ‘tough choices’ rhetoric of George Osborne and the policies of Gordon Brown. In the face of grim economic – and grimmer fiscal – forecasts, he announced energy support today but tougher times tomorrow, with huge stealth tax rises for the middle and top of the income distribution followed by far less concrete spending cuts pencilled in for after the next election. As an energy importer during an energy price shock, Britain is getting poorer. Deciding exactly how that blow should be shared out between different households, as well as between current and future taxpayers was, to a significant extent, the task facing the Chancellor. He decided that households will do so with higher energy bills, higher taxes, and worse public services than previously expected. Whether or not making the choices was tough, the reality of living through the next few years will be.

Key findings

The Office for Budget Responsibility’s (OBR) new forecasts point to unemployment rising by 500,000 and the economy being no bigger at the end of this parliament than its start. But more significant for the public finances is a fast-rising debt interest bill. Overall, these changes leave borrowing £270 billion cumulatively higher over the coming five years than was expected in March.
The Chancellor announced a £55 billion a year fiscal tightening to meet his (considerably loosened) fiscal target of getting debt falling as a share of GDP by 2027-28. The Government has swung from announcing the biggest tax cuts in 50 years to implementing biggest fiscal tightening since 2010 in just a few weeks.
Three-quarters of the fiscal tightening announced since the Spring is focused on spending cuts: this reflects that the £25 billion of new tax increases announced in the Autumn Statement largely fill the revenue hole caused by the remaining tax cuts from Truss’ tenure. However, the overall fiscal consolidation announced since the pandemic began is much more tax-rise heavy: Chancellors since the pandemic have raised taxes by 2.3 per cent of GDP (£68 billion or £2,300 per household in 2027-28). On this basis, the consolidation is entirely driven by tax rises, in contrast to the post-financial crisis fiscal tightening, when almost 80 per cent came from spending cuts. As a result, tax as a share of GDP is rising steeply, reaching its highest level since the Second World War (37.5 per cent by 2024-25).
To support households with energy bills next year, the Government will combine a slightly more generous repeat of Sunak’s lump-sum Cost of Living Payments for those on benefits and pensioners, with a more modest form of Truss’ Energy Price Guarantee (which will see a typical bill rise to £3,000 next April). Together, this will be less generous than the current year but more progressive. But those with harder-to-heat homes or larger families will be particularly hard hit by rising energy bills, with almost one-quarter (23 per cent) of households facing bills of over £4,000 next year.
Higher-income households will face higher tax hikes as a proportion of their income: 70 per cent of the new taxes for individuals announced yesterday will be paid by the richest fifth of households. However, relying on stealthy threshold freezes rather than more visible rate rises does raise some fairness questions. For example, someone on £62,000 loses as much from threshold freezes as someone on £124,000 in cash terms (£1,600) but twice as much as a share of income (2.6 versus 1.3 per cent). The decision to raise almost £5 billion through higher Council Tax is also very poorly targeted at those with higher incomes.
The Chancellor announced modest top-ups to departmental spending over the next two years, notably for the health service and schools. Beyond 2024-25, although public spending as a share of GDP is set to rise to 43.4 per cent in 2027-28, fast-rising debt interest costs are masking significant cuts to investment and public service spending pencilled in from 2025-26; notably, after the next general election.
Public Sector Net Investment (PSNI) will be frozen in cash terms from 2025-26: this £15 billion cut will see it fall from 2.5 per cent of GDP this year to 2.2 per cent in 2027-28, undoing over 80 per cent of the increase in PSNI originally planned by Rishi Sunak. A £22 billion reduction in day-to-day public services, combined with existing protections for health, defence and education, implies cuts to unprotected departments like transport, policing and local government of around 0.8 per cent per year between 2024-25 and 2027-28, taking real per capita spending back to the level they were at in 2014-15. Such cuts are likely to be undeliverable, requiring years of holding down public sector wages below those in the private sector.
Average real household disposable incomes are forecast to fall by 7.1 per cent over this year and next – equivalent to £1,700 per household – returning to 2014 levels. That is despite government policy offering significant support, with uprating of all benefits in line with inflation (10.1 per cent), and measures announced since the spring providing an average £1,300 boost to the lowest income households (mainly via targeted Cost of Living Payments) and highest income households (driven by the scrapping of the Health and Social Care Levy, partially offset by the lowering of threshold for the 45p rate of income tax to £125,000). The squeezed middle will receive less support, at £950 per household.
Accounting for all announcements this Parliament, policy decisions – and the freeze to personal tax thresholds in particular – are deepening the squeeze for all but the poorest quarter of the population (who gain more from increases to Universal Credit generosity than they lose from tax rises). While the poorest fifth will be £350 better off on average, typical households see their incomes reduced by £1,100 in 2027-28, rising to a £4,200 loss for the top decile.

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