The Chancellor delivered his Autumn Statement on 22 November against a background of recently released economic data.
Figures released by The Office for National Statistics in the days leading up to the Autumn Statement confirmed that we have experienced a subdued level of activity within the UK economy. Whilst there has been some volatility in monthly figures, caused, amongst other things, by some long-running industrial disputes, the overall picture is one of little or no growth over the past twelve months.
Tackling high inflation has been a priority for all developed economies over the past few years. A combination of successive Bank of England Base Rate increases and significantly lower gas and electricity (from October 2022) has reduced the headline UK inflation rate, as measured by the Consumer Price Index from something over 10% at the start of the year to 4.6% in figures released for October. The Bank of England inflation target is 2%, so although the latest data shows a significant move in the right direction and has allowed an end to a long period of interest rates being raised on a monthly basis, there is little immediate prospect of interest rates being reduced in a meaningful way.
It should always be remembered that the point of raising interest rates to reduce inflation is to slow down economic activity. This works by making borrowing more expensive and encouraging saving, so whilst continuing to control inflation remains a priority, the Chancellor has had to be careful about announcing policies that would increase economic activity through higher consumer spending (e.g. large tax cuts).
The second factor that needed consideration when drafting the Autumn Statement was the degree to which public finances allowed for either tax cuts or increased public spending. The freezing of personal tax allowances during a period of high inflation and fast wage growth ensured that tax revenues were higher in the period April to September 2023 than expected. The effect of this additional tax revenue has caused government borrowing to be significantly lower than forecast by the Office for Budget Responsibility, the official forecaster, for the first six months of the financial year. Therefore, not withstanding the effect on inflation, it could be argued that, in the short term there was scope to either cut taxes or increase public spending. In the longer term however, the effect of continuing high inflation and the associated rise in government bond yields will increase the government’s debt interest bill. Therefore any loosening of fiscal policy now risks being reversed in the not-too-distant future, unless the rate of inflation reduces faster than many analysts predict.
A third factor is political, there is temptation for a government facing an election within the next year or so to simply disregard some of the economic considerations in pursuit of short-term popularity.
Much will have been written about the measures taken in respect of changes affecting personal taxation and allowances. The Chancellor explained that one of the main reasons for the low rate of economic growth in the UK has been a prolonged period of under-investment by businesses with an associated lack of growth in productivity. It is virtually impossible for a modern economy to grow in a sustainable way without productivity gains. It was therefore entirely sensible that some measures were taken to encourage businesses to accelerate their rate of investment in new capital equipment.
The Chancellor announced that there were 110 measures included within the statement that would improve business investment. The money, scope and time-scales involved were varied, but some were of more general significance than others.
There was a demand by many in the business community that a tax allowance known as full-expensing was made permanent. When the measure was introduced in March 2023 it was as a temporary arrangement with an expiry date of 31 March 2026. Full expensing allows the full cost of a qualifying asset to be claimed as a capital allowance in the year the asset is purchased, it is available to limited companies as an allowance against Corporation Tax and applies only to new equipment that is not subject to hiring out to third parties. Whilst the allowance is currently available, many in the business world made the point that investment decisions were often taken some years in advance. Therefore, the removal of the allowance in 2026 limited the degree to which it would prove an effective incentive in accelerating the acquisition of new capital equipment.
In response to this demand, the Chancellor announced that full-expensing will now become a permanent allowance. Hire purchase agreements qualify for this allowance in the same way as outright purchase. This remains a particularly attractive means of acquisition because the full capital allowance is available before full payment for the equipment has been made. Further, it is worth remembering that any interest payments within a hire purchase agreement can also be claimed against tax as a business expense.
Whilst the full-expensing initiative was presented as being the most significant measure, the Chancellor claimed that all measures announced within the statement would add £20bn to capital equipment investment a year, within ten years.
