23 Nov 2023 | 3 minutes to read
Chancellor of the Exchequer Jeremy Hunt announced 110 policies in the Autumn Statement which he claimed would unleash entrepreneurialism, improve productivity and make work pay. Here we focus only on the most economically-significant and assess any market/investment implications beyond the headlines at the dispatch box.
Hunt claimed that the public purse was in better shape than previously forecasted in March 2023 with inflation falling, the economy growing and debt reducing as a percentage of GDP, eking out enough fiscal headroom to offer tax breaks. Headline policies include a reduction in the rate of National Insurance from 12% to 10% from January 2024 and new and extended business tax breaks. However, the government’s own fiscal watchdog, the Office for Budget Responsibility (OBR), said growth will be crimped by higher inflation and higher interest rates. The falls are quiet precipitous, with GDP growth forecasts from last March to today falling from 1.8% to 0.7% for next year, and from 2.5% to 1.4% for 2025. The OBR reckons the UK won’t therefore recover to pre-pandemic levels of growth until 2027-2028.
It was unsurprising that Prime Minister Sunak and Chancellor Hunt claimed that halving inflation was a “promise kept”. Inflation as measured by the Consumer Price Index (CPI) has fallen from 11.1% when Sunak acceded to power to 4.6% today. But the mechanics of this fall were largely beyond the government’s gift (a pandemic followed by a war-induced energy shock in Europe having each subsided) and consensus for some time has been for inflation to fall as quickly as it appeared. The OBR now expects inflation to fall slightly less quickly to 2.8% by the end of 2024 before moving towards the Bank of England’s optimal target of around 2% in 2025. Inflation in the UK may linger longer than anticipated.
Some might call the government’s self-proclaimed slaying of inflation a Pyrrhic victory given the damage it has wrought to real incomes. The UK is experiencing the worst peak-to-trough fall in living standards - roughly 3.5% - since records began in the 1950s according to the OBR. Tax-take is still rising to 70-year highs given fiscal drag, a combination of frozen tax bands and inflation chomping away at the real disposable income of the average UK household. The impact of fiscal drag is greater than the sum of any fiscal loosening.
Hunt is now making permanent a facility permitting businesses to offset capital-expenditure against corporation tax. So called full-expensing is a progressive policy encouraging businesses to invest more in plant and machinery and means that for every £1m of cap-ex, £250k of tax can spared. Undoubtedly pro-growth, this affords businesses more certainty (the current policy was due to expire in 2026) and should promote a more efficient allocation of capital. The OBR estimates that this policy and others announced will boost business investment by £14bn and bring 78,000 more people into employment by the end of their forecast period. This tax-break will cost over £10bn per year.
Hunt recommitted to the Mansion House Compact which aims to consolidate pension pots, encourage scale among providers and promote investment into smaller growth companies in an industry worth some £2.5trn. This strategy targets signatories with voluntarily allocating up to 5% of pension capital into unquoted and unlisted companies with a goal of improving outcomes for pensioners decades hence. We expect companies on the Alternative Investment Market (AIM) to benefit.
The rumour mills had been turning for weeks but in the end the Chancellor gave no airtime to several key areas:
Despite the spectre of the turmoil of the Truss-Kwarteng mini-budget of September 2022 hanging in the air, markets have been reassuringly calm since Hunt’s latest missive. UK government debt of all maturities moved little, UK equities are unchanged and sterling has been flat-to-positive against the dollar and euro.
Overall, this means that the key drivers for markets in the near-term remain the battle to quash inflation, whether central banks including the US Fed, BoE and ECB are near or at peak-interest rates and indeed when we might see the first cuts to rates in the new year. There is currently a wide dispersion of views among economists and futures markets about the timing of these pivotal moments, but the direction of travel is clear. This will likely be the single-most important dynamic for investors over the next 6-12 months.
We continue to attempt to protect on the downside through cautious positioning, seeking opportunistic returns where the risk-reward trade-off makes sense within the mandate we have, and remain exposed to the long-term structural growth trends which will drive returns in future.
Pre-general election giveaways are nothing new. Thirteen years into Conservative rule, the main parties are attempting to distinguish themselves and set the political narrative. Chancellor Hunt attempted to cast himself as a competent captain at the helm and paint a rosier outlook than in March. The OBR’s independent view is more sanguine. Shadow Chancellor Rachel Reeves has said Labour will support votes on the reduction to National Insurance and business tax breaks, but that these measures will not ultimately trigger sufficient growth to radically improve the economy or people’s lives. She has emphasised Labour’s commitment to close what they perceive to be unjust loopholes, such as the taxation regime of UK res-non-doms. The contours of the battle ahead are just being drawn.
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