As Hunt sat down, the Office for Budget Responsibility released its latest economic and fiscal outlook.
The OBR says that despite the new support with energy bills, living standards are going to fall by 7% over the next two years.
That’s a dire outcome, wiping out eight years of growth.
The OBR says:
Over £100bn of additional fiscal support over the next two years cushions the blow of higher energy prices – but the economy still falls into recession and living standards fall 7% over two years, wiping out eight years’ growth.
Over the medium term, around £40bn in tax rises and spending cuts – in roughly equal measure – offsets higher debt interest and welfare costs and gets debt falling as a share of GDP.
The fall in living standards next year will be the biggest on record, so since at least the mid-1950s, the OBR adds:
On a fiscal year basis, RHDI per person (a measure of living standards) falls by 4.3% in 2022-23, which would be the largest since ONS records began in 1956-57.
That is followed by the second largest fall in 2023-24 at 2.8%.
This would be only the third time since 1956-57 that RHDI per person has fallen for two consecutive fiscal years – the last time this happened was in the aftermath of the global financial crisis.
This chart shows the scale of the hit to living standards, as inflation hammers households.
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When Rishi Sunak delivered his spring statement earlier this year, the Office for Budget Responsibility said it was going to take the tax burden (taxation as a share of GDP) to its highest sustained level since the second world war.
The tax burden is still forecast to reach a post-war record later this decade – only now it will peak at an even higher level. Here is the chart from the OBR report saying so.
The OBR says:
Taking forecast and policy changes together … the tax burden rises from 33.1 per cent of GDP in 2019-20 to 37.1 per cent of GDP at the forecast horizon, 1.0 percentage point higher than forecast in March and its highest sustained level since the second world war.
Despite cuts in departmental budgets, total public spending also rises – from 39.3 per cent of GDP in 2019-20 to 43.4 per cent of GDP in 2027-28 – 2.9 percentage points higher than predicted in March, reflecting higher debt interest and welfare spending raising cash spending, and the energy-shock-driven smaller economy.
The IEA, the libertarian thinktank credited with coming up with many of the free-market policies pursued (with disastrous results) by Liz Truss and Kwasi Kwarteng, is not impressed.
It has described Hunt’s statement as “a recipe for managed decline” rather than a plan for prosperity.
That chimes with the muted reaction from pro-Truss MPs in parliament.
Eight weeks ago, though, Trussonomics looked like a recipe for mismanaged decline, as the pound cratered following the mini-budget.
Other rightwing thinktanks also aren’t happy, reports Dominic Penna of the Telegraph:
State schools in England will receive a funding boost of £2.3bn a year for the next two years, Jeremy Hunt has announced – with the Treasury saying the extra £4.6bn amounts to an “average cash increase for every pupil of more than £1,000” by 2024-25 when compared with last year.
The extra cash would mean core schools funding rising from £53.8bn this year to £58.8bn by 2025, meeting a previous pledge by the government to restore funding for pupils up to the age of 16 back to 2010 levels in real terms.
The announcement was greeted with relief by school leaders, who have been lobbying ministers publicly and privately for more funding to counteract the effects of steep rises in pay and energy costs that have been wreaking havoc with budgets.
Geoff Barton, general secretary of the Association of School and College Leaders, said the announcement was “positive news” that suggested the concerns of parents and school leaders were being heard by government. He said:
We’ll be closely looking at the figures to fully understand the implications. In particular, we’ll be looking at where this leaves special educational needs and post-16 provision which are both facing extraordinarily difficult financial circumstances.
We recognise this commitment to education is made in the context of a bleak economic picture but to put it into perspective this comes after a decade of real-terms cuts to schools and colleges.
Karen Roberts, chief executive of the Kemnal Academies Trust, which runs 45 primary and secondary academies in the south and east of England, said the extra money would make “some headway” in bridging current funding gaps. She went on:
However, with costs rising, on average, by 7% and the increase in funding announced equating to approximately 3% it is not clear where the extra funding needed to plug the gap will be found. My concern is that it will be up to individual schools to find the money.
The decision not to extend extra funding to sixth form or further education colleges was hugely disappointing, according to sector leaders.
David Hughes, chief executive of the Association of Colleges, said: “I’m pleased to see some extra school funding – they need it. But the failure to extend that to colleges is devastating.”
Hunt has delivered “a budget that boils the frog”, says Genevieve Morris, head of tax at Blick Rothenberg.
That’s because the decision to freeze tax thresholds, rather than lift them in line with inflation, means millions of people will pay more tax due to “fiscal drag”.
The continued freezing of tax thresholds means most people won’t notice it directly as the temperature increases, and so won’t leap out of the water.
They’ll simply discover years down the line that they boiled.
Smaller companies are also getting the scalded-amphibian treatment, because Hunt froze the VAT registration threshold at its current level until March 2026.
Martin McTague, chair of the Federation of Small Businesses, has criticised Hunt’s announcement, saying:
“Today’s Budget is high on stealth-creation and low on wealth-creation, piling more pressure on the UK’s 5.5 million small businesses, their employees and customers.
Stealthily freezing the VAT threshold at a time of sky-high inflation will both drag more struggling small firms into scope for the tax, while disincentivising others from growing.
FSB’s research shows one-in-four (24%) of small firms and the self-employed are held back by the VAT threshold.
McTague also warns that Hunt has pushed up the cost of employing people – at a time when unemployment is already expected to rise by 505,000:
Freezing the threshold for employer national insurance at a time of such high inflation is a stealthy hike in the jobs tax, just as recessionary pressures threaten an increase in unemployment.
Alongside the understandable rise in the Living Wage, this budget will ramp up the costs of employment without offsetting that with measures to reduce other business costs
Six weeks ago, when Kwasi Kwarteng presented the mini-budget, the government was being run by Laffer curve fundamentalists who believed that cutting taxes would not only generate higher rates of growth, but also increase Treasury revenues. My colleague Peter Walker has been listening to the responses to the autumn statement, and he says nothing has been heard from that faction of the Conservative party in the chamber. Theresa Villiers came closest to endorsing Trussonomics, he says.
As Paul Johnson, the head of the Institute for Fiscal Studies thinktank points out, the figures in the Office for Budget Responsibility report show that the reason why the chancellor is needing to cut spending and put up taxes so drastically is because the cost of government debt interest – the amount it has to pay to service its borrowing – has gone up enormously this year.
Referring to the graph in Johnson’s first tweet, the OBR says:
Debt interest spending (net of asset purchase facility, or APF, flows) more than doubles in cash terms from £56.4bn (2.4 per cent of GDP) last year to peak at £120.4bn this year (4.8 per cent of GDP), the highest since immediately following the second world war both as a share of GDP and as a share of revenue (12.0 per cent).
Johnson says this explains the background to the autumn statement.
UK house prices are expected to have fallen by 9% in two years’ time.
The Office for Budget Responsibility predicts that the jump in mortgage rates will cool the market, while the recession will also hit demand.
The OBR says:
House prices are forecast to fall by 9.0% between the fourth quarter of 2022 and the third quarter of 2024, largely driven by significantly higher mortgage rates as well as the wider economic downturn
That means the house price correction will be well under way when the next election could be taking place in 2024.
Prices are then expected to recover slowly, and “remain below their current level for the next five years”, the OBR adds:
Both Nationwide and Halifax have reported that house prices fell in October, as the mini-budget spooked buyers.
Looking further ahead, property agent Emma Fildes of Brickweaver predicts a jump in sales in 2025, when Jeremy Hunt has announced the stamp duty cuts from the mini-budget will end.
The cost of bailing out failed energy supplier Bulb has ballooned to £6.5bn, it has emerged.
Documents released alongside the autumn statement show that £4.6bn will be spent on handling the company in 2022-23. In March, the Office for Budget Responsibility said the rescue would cost £2.2bn over two years.
Bulb, which has around 1.5 million customers, collapsed in November last year and was put into a special government-handled administration.
The government has faced criticism for not allowing the company to buy power ahead, exposing it to volatile gas prices.
Bulb was bought by rival Octopus Energy late last month in a deal that founder Greg Jackson vowed would be a “fair deal” for taxpayers.
However, it is still awaiting court approval after rival suppliers complained over a lack of transparency over the terms of the acquisition.
More bad news for workers – real wages are expected to shrink this year, and next year.
The OBR warns that strong nominal earnings growth will be wiped out by high inflation.
So real wages (ie, adjusted for rising prices) as expected to shrink by 1.8% this year, and by another 2.2% in 2023.
The last time real wages fell for two consecutive years was following the financial crisis, when real wages fell for six consecutive years from 2007 to 2013.
Unemployment is set to rise by more than half a million, as the UK falls into recession.
The OBR predicts that the jobless total will rise by 505,000 from 1.2 million at present to 1.7 million at its peak.
The fiscal watchdog says:
We expect the rise in unemployment to lag the fall in GDP as vacancies are likely to fall first before workers are laid off.
Ramping up energy efficiency is a no-brainer when it comes to cutting energy bills, ensuring security of supply and reducing climate-heating emissions. In Jeremy Hunt, the Conservatives appear to have found a brain. In the autumn statement, he pledged to double annual energy efficiency investment with new funding of £6bn.
That is the good news. The bad news is that doubling does not happen until 2025, when the energy bills crisis may well be over and the climate crisis will be even worse. Hunt is the fourth chancellor of 2022 and the chaos in the Tory party has meant unnecessary delays in making people’s homes warmer and cheaper to heat.
The trouble goes back almost a decade in fact, when David Cameron’s ditching of “green crap” resulted in insulation rates falling by 95%, a decision that has cost billpayers billions. Details of the new efficiency plans are yet to be published but will include a new “energy efficiency taskforce”. Its goal will be to reduce the UK’s energy use in buildings and industry by 15% by 2030, a fairly modest ambition.
On the supply of low-carbon energy, Hunt backed expensive nuclear power as well as offshore wind, but said nothing on the fastest and by far the cheapest sources – onshore wind and solar. With blocks on the latter, the Tories continue to be wildly out of tune with voters.
Hunt increased the windfall tax on soaring oil and gas profits from 25% to 35%, making the total tax rate 75%. That may look high, but remember that the oil and gas belongs to the nation – you and me – not the fossil fuel companies, and other nations like Norway have higher rates. A windfall tax on electricity producers of 45%, including wind, solar and nuclear, was also announced by Hunt. Depending on how that is implemented, the green energy companies could end up being taxed more than the fossil fuel producers. That would be mad when green energy is the solution to the energy and climate crisis, and while oil and gas firms can get 91% tax rebates by investing in more oil and gas.
Electric car sales are in the fast lane and Hunt announced that from 2025 owners will need to start paying vehicle excise duty, also known as road tax. That is a disincentive to go electric but by that date electric cars will not only be cheaper to run, as they already are, but also very probably cheaper to buy than petrol or diesel models.
On climate change, Hunt said: “With the existential vulnerability we face, now would be the wrong time to step back from our international climate responsibilities. So I can confirm that, despite the economic pressures, we remain fully committed to the historic Glasgow climate pact agreed at Cop26, including a 68% reduction in our own emissions by 2030.” The government is not currently on track to meet this target.
The autumn statement’s purpose was to find £55bn in tax rises and spending cuts to stabilise the UK economy. To put that in context, that’s about 18 days’ worth of the pure profit the global oil and gas industry has been banking for the last 50 years.
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Andrew Sparrow and Graeme Wearden