The Autumn Budget Statement is set to give us an insight into Prime Minister Rishi Sunak and Chancellor Jeremy Hunt’s economic strategy, coupled with a view on how the government will tackle the cost-of-living crisis.
But there must be a fine balancing act. While Hunt’s aim is to correct the mistakes made in Liz Truss’ Mini Budget on 23 September 2022, which was met with panic from the markets and resulted in a sell-off of gilts, he also has to ensure that the changes don’t alienate voters.
The Autumn Budget Statement announcement was initially reserved for Halloween (31 October) but was pushed back to the 17 November. While some speculate that the government wanted to avoid ‘fright night’ for the obvious headline grabbing attention it would bring, the official line is that the delay allows Hunt and his team to make the “right decisions” for the British economy.
What is the Autumn Statement and how will it affect your wallet?
The aim of this budget statement will be to reassure the markets and demonstrate that Chancellor Hunt has a grip on the public purse. It will be the first test of whether the markets approve of Hunt’s economic policies.
So, what can we expect from the Autumn Statement? Here are five things that could affect your finances:
1. Tax hikes and austerity
The UK government exercised austerity measures during the financial crisis in 2008. The government will now have to exercise austerity measures again to plug the estimated £40 billion black hole in the nation’s finances.
But what does austerity mean exactly? For the government, it means introducing tax hikes and making spending cuts. This time, the key will be creating a balance between tax increases and spending cuts. According to some reports, the new team would like a 50:50 split between tax increases and spending cuts.
For context, after the Financial Crisis in 2008, then Chancellor George Osborne favoured an 80:20 split, which translated to more spending cuts and smaller tax hikes. We could be in for similar ratios if reports of Hunt consulting Osborne are anything to go by. Even if financial markets appear calmer, we still look set for a challenging period in the UK over the next few quarters.
When it comes to tax hikes, everyone will have to contribute more if public services are to be maintained. There are several predictions when it comes to taxes including a stealth tax where Hunt will effectively extend the freeze on income tax thresholds from 2026 to 2028. Usually, the government will tweak the tax thresholds to account for inflation and increases in earnings. But if this isn’t done, many millions of people will pay a higher rate of tax.
Reinstating the National Insurance hike to 1.25% could also be on the cards. It was initially introduced while Prime Minister Boris Johnson was still in power, but this was reversed when Truss became Prime Minister. It is estimated that the NI hike could bring in an extra £13 billion, which would go some way to plugging the £40 billion black hole and why it can’t be disregarded as a possible solution for the government.
Motorists could be in for some pain too as it’s thought that a fuel duty hike could be on the cards. In the Spring Budget of this year the fuel duty was cut by 5p a litre for a year. Sunak, who was Chancellor at the time claimed this was the biggest cut ever in fuel duty. The cut will stay in place till March 2023 but there’s no guarantee it will remain.
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2. Spending cuts
Hunt must close a £40 billion black hole, as identified by the Institute for Fiscal Studies (IFS), but there are claims that he will also try to find an extra £10 billion in savings to reassure the markets. It’s not clear where the spending cuts will be implemented but it’s safe to assume these will have to be made across the board. Hunt has said that the NHS and defence will not be excluded.
It also means that government can’t afford to be generous with pay increases – according to The Times, public sector workers will only get 2% pay rises, and this will undoubtedly lead to strikes and service disruptions.
3. Reduction in benefit
Hunt was as saying he would make ‘difficult decisions’ and this could well mean that those on benefits will feel the pain too. The benefits bill takes a fair chunk out of government coffers. According to the Department for Work and Pensions (DWP) working-age benefits in Great Britain cost £87.4 billion in 2021/2022.
While increases in benefit payments may not be scrapped altogether, there’s no guarantee that they will increase in line with inflation.
4. Reduction in State pensions
The state pension triple lock, which was introduced by David Cameron’s government back in April 2012, is in danger of being meddled with too. The triple lock influences how much pensioners will receive in their state pension income each year.
Under the current rules, pension payments will increase in line with whichever of the following is the highest:
– Earnings: this is taken from the average percentage growth in wages.
– Inflation – using the Consumer Price Index as a measure
– Or 2.5%
State pensions could rise by 10.1% as inflation has now jumped into double digit figures. But if the government abandons the triple lock promise it could save billions. It would be an unpopular move though, so dropping the triple lock is not a certainty.
5. Reduction of support on energy bills
Back in early October some claimed the Energy Price Guarantee (EPG) support could cost the taxpayer around £140 billion in an “extreme” scenario. Hunt has already made changes to the EPG scheme – reducing it from two years to ending in April next year.
The government will do a review of the EPG in April. There’s no guarantee it will be extended beyond this point, but it could apply to the most vulnerable households.
What do all these changes mean?
If some or all of these predictions come true later this month it means that inflation will eat into our savings and our incomes. Despite this, we will have to rely on the money we earn rather than what the government can offer as benefits and the State Pension could well not grow in line with inflation.
That means now, more than ever, we must make sure that our savings work harder. If your money is in a low interest rate account, if your bank isn’t increasing the interest rates on savings accounts it’s important to evaluate whether you are, in fact, still getting value out of this offering.