Fiscal consolidation by the backdoor: analysing the Autumn Statement 2022

The substance of last week’s Autumn Budget contrasted markedly with September’s ill-fated mini fiscal statement delivered by Chancellor Hunt’s predecessor – much of the pain heavily trailed in advance, and no attempt to pull rabbits out of the hat in case the financial markets reacted badly. Now that the dust has settled a bit, we wanted to have a look at the announcements that are most pertinent to the business community in the South West. 

It’s fair to say the record inflation is doing a lot of heavy lifting for the Chancellor in bridging the black hole in the public finances, and the consolidation has been extensively backloaded into the post 2025 period, especially on the public spending front. The biggest message for businesses and employers is the impact of ‘fiscal drag’ – stealth tax rises by the back door as prices and wages increase and an ever larger proportion of incomes come into the scope of tax for the first time, or at higher rates than before.  

What do employment and personal tax measures mean for employers and individuals? 

The most relevant case for Business West members and the wider business community in the region is the freezing of the secondary threshold for employer National Insurance Contributions – the point that employers have to start paying payroll tax for their employees – which will remain fixed in cash terms for 5 years from April 2023 – netting the Treasury a tidy £3bn in next year alone, rising to over £5bn in later years. This contributes to inflationary pressures on businesses in an extremely tight labour market, eroding profitability especially for human capital intensive sectors such as social care, hospitality and retail. The rates of National Minimum and Living Wages are set to increase by nearly 10% from April 2023 on the advice of the Low Pay Commission, further squeezing employers’ margins. 

Personal tax thresholds are also being held flat in cash terms, meaning more staff find themselves in the basic and higher rate income tax bands, even before the level that the additional (45%) rate kicks in (£125,140 from 6 April 2023, down from £150,000 previously). Real household incomes are being hit by an historic 7% next year as inflation remains high, taxes are going up across the board, and unemployment is expected to increase. 

Changes to Business Rates are coming… 

Business rates, the tax on bricks and mortar businesses, is subject to a lot of overlapping changes in the Budget so it's worth readers checking their positions carefully – see page 54 of the main document here. At a high level, there is a revaluation of all chargeable premises (to update the values to 2021 levels, from 2017 previously), and some transitional relief to smooth the jumps in bills caused by the uprating. Retail, hospitality and leisure business premises benefit from (more generous than previous) support to discount bills at 75%, up to a cash cap of £110,000 – some support for a sector that faces distress given consumer purchasing power is set to fall so dramatically. 

The impact of research and development cuts for smaller businesses 

We were worried about cuts to innovation and other growth focussed policy areas, and these came to pass, via a substantial cut to research and development tax relief for smaller businesses - 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%. These cuts more than fund an increase in the rate of the Research and Development Expenditure Credit (RDEC) for larger businesses (rising from 13% to 20%) and have been (poorly) justified by the chancellor pointing to potential fraud within the SME scheme. The valid claims of innovative smaller businesses in our region are losing out, undermining the growth narrative the Budget was supposed to drive. 

How will businesses be supported with energy costs? 

Energy is a big issue for many members of Business West, and a few illuminating details were scattered through the statement worthy of note. Firstly, the Government have further hiked and extended the windfall tax oil and gas producers extracting hydrocarbons from the UK pay by another 10 percentage points (‘Energy Profits Levy’) which sets awkward fiscal stability issues that could hamper international investors looking at the UK as a destination. Secondly there is a new windfall tax on low carbon electricity generators, including those in the nuclear and renewables sectors via the ‘Electricity Generator Levy’ – a 45% tax levied on ‘excess returns’ arising from 1 January 2023. Both windfall tax measures raise a combined £7.5bn in the 2023/24 financial year. 

For businesses consuming energy (which is almost everyone!) the price support that was announced by the previous Truss Government in September remains in place for the original 6 months through to 1 April 2023. The costing of this measure has now been published at £18.5bn. The support available to some businesses after 1 April 2023 will be confirmed in due course, with a consultation published alongside the Budget, and the findings to be released by the end of the year. Early certainty about ongoing support is a key advocacy ask from Business West so we will be feeding into the consultation via the British Chambers of Commerce to shape the outcome for our regional business community. 

The government has today published terms of reference for the review, with the findings to be published by 31 December 2022. While the government recognises that some businesses may continue to require support beyond March 2023, the overall scale of support the government can offer will be significantly lower, and targeted at those most affected to ensure fiscal sustainability and value for money for the taxpayer. 

What can we conclude? 

• A host of other measures with less of a business focus added to a weighty Budget package, but standing back and trying to summarise the situation, we would posit a few conclusions: 
• The national financial outlook is substantially poorer than the last Budget statement, with household incomes falling dramatically as the costs of essentials is rising very quickly and will stabilise at a much higher level than our economy is used to. 
• Public services have been dealt a temporary reprieve from the swinging cuts in the next two years, but beyond that austerity is set to return. 
• There was little by way of a coherent economic strategy presented in the Budget that would give businesses confidence and support their willingness and ability to invest or grow. 

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