Autumn Statement Alert: What’s Brewing for Investors, Savers & Markets?
Mark your calendars—on 22 November the Chancellor will drop the Autumn Statement, following the March 2023 Budget. It’s the big financial play of the year, and here’s a quick rundown of what’s at stake.
Key Things to Watch
- Economic Snapshot – The Office for Budget Responsibility (OBR) will lay out the latest numbers.
- Fiscal Health – How the debt‑under‑eye looks after inflation has wiggled tax revenue in and spending out.
- Potential New Moves – What the Chancellor might roll out to keep the economy humming.
Why It Matters for You
The economy is taking a hit: recession feels like a real possibility, not just a buzzword. In a downturn, pulling the fiscal string on the levers can seem like a good idea—except the UK’s fiscal rules are more pro‑cyclical than counter‑cyclical. When growth is strong, the budget can dip. When growth is weak, the budget flexes less, turning many deficits into “structural” snarls that limit how much stimulus we can squeeze out.
So, any fresh measures hinge on the OBR’s forecast. If they see sluggish growth, we’ll have less room to wiggle the budget; if they’re optimistic, the Chancellor might just sprinkle a little extra money.
Bond Market’s Big Question
Gilt yields have been on a rollercoaster—rising because of high inflation and sharper rates. Now inflation is flattening (though still ahead of pre‑pandemic levels), and rates likely hit their zenith at 5.25%. The likely next step: cut rates in the second half of next year. That signals that bond yields probably sit near their peak.
Even if the bond market is oversupplied, a weaker economy could push yields down. The side‑eye on the Autumn Statement will determine how bond issuances and policy should shape the near‑term outlook.
Keeping the Market Happy
The Chancellor has shown it’s all about market confidence. In 2022, his Autumn Statement focused on stabilising markets after the mini‑budget shake‑up and the LDI crisis—an era where investors freaked out over the credibility of UK monetary policy and inflation spiked to 11.1%.
By March, the talk shifted to growth. Investors had their heads already on the table: they’d seen a smooth pre‑announcement, and the market was ready for the surprise.
Countdown to Election Day
Remember, a general election must happen by January 2025 (though many eyeballs suspect it might slip to next autumn). The Autumn Statement and March 2024 Budget become the stage for the Chancellor to announce new spend or tax tweaks—often a classic move: tease policy before the election.
Who’s the latest example? Labour’s Roy Jenkins in 1969‑70 kept the budget tight before an election and ran a surprise victory against the Conservatives. Since then, the UK cleared the budget deficit in almost every year (yes, even only five times with surpluses), with the recent years featuring sizeable deficits.
Debt Trap Warnings – A Quick Buzz‑Bit
Earlier this year, I flagged the risk: debt is sky‑high, growth is tepid, and interest rates are spanking. They’re all tangled, and that’s probably why markets feel nervous—not just in the UK but across many Western economies. Boosting growth while trimming rates could flip this picture upside down.
Bottom line: Keep your ear to the ground, watch the OBR’s levers, and brace for a potentially low‑key Autumn Statement that could surprise—or pave the way for a financial rally before the election.
The economic backdrop
Inflation is easing and is set to fall further. However, the cost-of-living crisis has already taken its toll, squeezing real incomes and forcing a significant tightening in monetary policy. One could have used the word ‘resilient’ to describe the economy over the last year; now, the words ‘sluggish’ and ‘vulnerable’ may be a better description. Growth is sluggish and the economy is vulnerable to both a global slowdown and as the full impact of the already-announced Bank of England’s monetary policy tightening feeds through.
In March, the OBR was forecasting that the economy would shrink 0.2% this year before rebounding to grow by 1.8% next year, 2.5% in 2025, 2.1% in 2026 and 1.9% in 2027. There have been significant upward revisions to post-pandemic UK growth numbers since. Also, the latest HM Treasury summary of independent forecasters points to growth of 0.4% this year, followed by expected growth of 0.5% next year.
Last week we saw the Bank of England present a downbeat economic assessment, stating that, “Relative to the(ir) May projection, quarterly GDP growth is expected to be weaker throughout much of the forecast period, particularly through 2024 and at the beginning of 2025.”
What will be of particular interest is the OBR’s assessment of household disposable income. In real terms, after allowing for inflation, the OBR stated in March that they expected a decline of 5.7% over 2022 and 2023. Although this was better than the 7.1% hit they forecast last autumn, it still represented the biggest fall since World War Two. With inflation now decelerating and wages rising, the outlook may be for an improvement.
Despite this, recent data is sending enough warning signs (with the purchasing managers’ indices in recession territory and monetary growth stagnant) suggesting recession is likely. In such an environment, markets are now expecting future rate cuts.
Fiscal numbers and measures
A common characteristic of Chancellor Hunt’s 2022 Autumn Statement and this year’s Budget has been the sheer number of policy measures: 75 last year and 85 in the spring. It would thus not be a surprise if there was another raft of measures this time. Many were small, reflecting micro-managing. It is the big picture, though, and the scale of any fiscal stimulus in this Statement that will be key.
Last year, with his focus on stabilising the markets, a significant fiscal tightening was announced of £131.3 billion over the period up to and including 2027/28. This included a significant squeeze on future spending in the next parliament. Then, by the March Budget, there was a stimulus of £91.3 billion, as growth was the focus.
During the first half of this fiscal year the budget deficit was much lower than the OBR forecast in March. Public sector net borrowing, excluding public sector banks (PSNB ex), from April to September 2023 was £81.7 billion. This was £19.8 billion less than the £101.5 billion forecast by the OBR. This highlights the large margin of error characteristic of official forecasts for the budget deficit. Despite this better outcome, the numbers are still poor, highlighted by the fact that they are £15.3 billion higher than in the same period last year.
In addition, the Chancellor has two fiscal rules to meet: that the budget deficit is less than 3% of GDP; and that the ratio of debt to GDP is falling within five years.
Beneath the headline figures a multitude of factors are at play. The latest numbers and plans suggest the UK is moving into a primary surplus, with revenues exceeding non-debt interest spending.
However, interest payments have risen sharply over the last couple of years, exacerbated by the fact that quantitative easing has shortened considerably the maturity of UK government debt and left it more vulnerable to higher interest rates.
Meanwhile, higher inflation has impacted both the expenditure and revenue side; departmental spending has been squeezed in real terms by higher inflation, while inflation has also boosted tax revenues, in nominal terms. This adds to the pressure to increase departmental budgets, although part of the challenge here is what inflation measure to use, such as the GDP deflator, to determine how much to boost such budgets.
Likewise, the tax take has risen sharply, with fiscal drag having a significant effect, as people are dragged into higher tax brackets. If inflation and fiscal drag were to persist then it could see revenues improve significantly in coming years.
Fiscal measures need to be necessary, affordable and non-inflationary. They also need to be targeted. Measures to help the supply-side of the economy are always welcome. For instance, full expensing was a welcome feature of the 2023 Budget, although it was not made permanent then because of the need to meet the fiscal rules on debt to GDP in the last year of the forecast. The case remains to make this permanent.
The March Budget also saw another supply-side measure aimed at encouraging people to remain in work, with significant changes to pensions: the tax-free annual pension contributions cap was raised from £40k to £60k and the £1.073 million tax-free lifetime allowance on pension pots was abolished.
Petrol duty is widely expected to be frozen again, which would help firms and people alike, although it is costly. With demand sluggish and inflation pressures easing, there is a case to help demand with tax cuts. All too often the political focus on tax cuts dominates the fiscal debate. In economic terms, tax cuts should be seen as one part and not the sole part of the story as to whether there should be a fiscal boost. The focus should be aimed at the basic rate.
While further supply-side measures now would be welcome, given the sluggish state of the economy, plus the approaching election, it is more likely any boost now will focus on demand. However, these measures could be delayed until the March 2024 Budget, too.
Since the 2008 global financial crisis, the economy and markets have become used to monetary policy acting as the shock absorber for the economy. The importance of fiscal policy both in terms of demand management, as well as in terms of the incentives it sets across the economy, can thus often be overlooked.
Even though the UK’s fiscal numbers are coming in better than expected, the prospect is that the combination of fiscal rules, weak growth and a high level of debt will limit the amount of fiscal space – namely the amount the Chancellor can inject via higher spending or lower taxes. Based on the first half of this fiscal year, a figure close to £40 billion is possible, but it may be less as much will depend upon the OBR’s growth forecasts.
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