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Autumn Statement 2022: A very different fiscal statement
Another year of crises and turbulence has left us once again with yet another new Chancellor delivering a fiscal statement in ‘unprecedented’ times. The inter-related challenges of the war in Ukraine, COVID recovery, supply side inflationary shocks and concerned market analysts leave the country facing ‘eye wateringly difficult’ decisions to tackle inflation, restore stability and get debt falling.   So less than eight weeks since Kwasi Kwarteng delivered the now infamous “mini-Budget” which stood out as the largest tax-cutting budget for 50 years, his successor Jeremy Hunt pivoted sharply to measures that will mean the highest tax burden in the UK’s post-war history by 2027-28 – equivalent to some 37% of total GDP.   After the fallout from the mini-budget, the markets, the Bank of England (BoE), and now the OBR have all had their say: any talk of fiscal headroom has vanished. Far from the boosterism of previous statements, this government’s priorities are now stability, growth and public services.       Return to the orthodoxy To reassure markets after recent turmoil, we were left in no doubt that the Office for Budget Responsibility (OBR) are back in the centre of things, having been essentially ignored by Kwarteng. Their independent forecasts for the economy and the public finances arguably now have more weight than at any point in the OBR’s 12 years of existence.   The OBR forecasts are similarly pessimistic in the near term to the Bank of England (BoE) (announced earlier this month), with a 1.4% decrease in GDP forecast for 2023 (1.5% BoE) but are more optimistic that this will not be the long recession forecast by the Bank of England, rebounding to growth of 1.3% in 2024 (-1% BoE 2024) and 2.6% in 2025. Even in this scenario, the OBR forecast that the ‘output gap’ will not see the economy recover to potential output levels until mid 2027 (i.e. when energy prices and inflation are set to drop) assuming that monetary policy responds to the fiscal tightening with equivalent easing.   Comparison of forecasts for real GDP growth Source: OBR, November 2022 Economic and fiscal outlook  Much of the difference can be attributed to the policy measures announced, that the OBR have been privy to in arriving at their forecasts. The reaction of the Bank of England will at least in part tell us whether the fiscal and monetary policies are in lock step.   Similarly, historically sluggish business investment, already the focus of the Prime Minister’s Budget last year when Chancellor, is 8% lower than pre pandemic levels and set to stay lower until Q3 2025.    Business Investment levels Source: OBR, November 2022 Economic and fiscal outlook  The Chancellor has been clear that addressing the ‘fiscal black hole’ means that all spending decisions have to add up to the forecasts which will really put the OBR in control. Therefore in a marked reversal from the last fiscal event there were no ambitious supply side reforms or investments, although planning reform remains part of the agenda with announcements to follow.     Funding for local Government The Autumn Statement confirms that departmental budgets will be maintained at least in line with the budgets set at last year’s Spending Review, albeit inflation is eroding these in real terms. Under the previous period of austerity, local government funding saw a disproportionately high proportion of the overall cuts. According to Centre for Cities analysis, local government in England saw its budget cut by more than half between its peak in 2009/10 and 2015/16 and the Institute for Fiscal studies analysis of the Autumn Statement make clear that the cuts of the 2010’s will not be undone for the Department for Levelling Up Housing and Communities (labelled as Housing and Communities in the chart below).   Source: IFS Analysis of Autumn Statement, 2022   Local authorities – some of which are claiming they are close to bankruptcy including Kent and Hampshire – will therefore likely welcome the additional flexibility granted by the Chancellor to raise Council taxes, providing some of the fiscal devolution that local areas have asked for. However social care will consume much of this. The Chancellor has allowed Council tax to be increased by up to 5% including a 2% social care precept.     Levelling up Levelling up appears to be back, but under the austere spending expectations there were no ‘rabbits out the hat’. The second tranche of the Levelling Up Fund will be £1.7 billion – similar to the first tranche.   New and confirmed devolution deals for Cornwall, Suffolk, Norfolk, and the North East (which is awaiting confirmation of its constituents as to the inclusion of Durham) were announced.   Devolution was also mentioned as a driver of growth. In particular, the trailblazer deals for Greater Manchester and the West Midlands, with the potential for ‘departmental-style’ settlements at the next spending review with the suggestion that this is a move away from the much maligned competitive bidding processes.   The proposed Investment Zones – one of the flagship proposals in the mini budget – have largely been watered down and will be ‘refocused’ around universities but there will be no tax reliefs or budgets associated with them. The existing expressions of interest from local authorities will not be taken forward which will no doubt leave many frustrated.   The government has also scrapped the list of infrastructure projects that were flagged for acceleration in the Growth Plan but there was a return to more of the priorities of the levelling up era. The Chancellor recommitted to HS2, Northern Powerhouse Rail and East West Rail investments.   There was notably no mention of the Shared Prosperity Fund, which poses some technical questions about the ability for local areas to spend the expected £400m fund which was to replace EU funds.      Housing and planning The Autumn Statement offered little by way of specific measures on housing and planning, so industry minds will instead be focused on the upcoming planning reforms – likely being re-drafted given the changing priorities of the day, the return of Michael Gove to his former brief, and the levelling up and regeneration bill currently passing through the House.   The exception was the stamp duty cuts which are now scheduled to continue to April 2025, when they will be tapered. Despite this measure, the OBR house price forecasts are somewhat stark – with prices not forecast to return to current levels until 2027, this is likely due to the overwhelming effect of mortgage costs outweighing any fiscal benefits from the stamp duty relief.    House Price and Mortgage rates Source: OBR, November 2022 Economic and fiscal outlook  Away from the Autumn Statement, the Secretary of State has restated his commitment to the manifesto pledge of delivering 300,ooo homes a year. Building ‘beautiful’ homes has been retained as a priority, and as a way to achieve local support for house building. Howeverwith less funding and dwindling parliamentary time meeting this target will become increasingly difficult to achieve with the OBR forecasting that net additions to fall from current levels (NB this is for the UK not England).   Net additions to the housing stock, UK Source: OBR, November 2022 Economic and fiscal outlook    Conclusions The Chancellor’s priorities from the Autumn Statement were clear.   Top of the list was to provide stability, and the initial market response suggests the Chancellor has delivered on this. Many of the measures and the gloomy economic forecasts were expected, and the tax rises and spending constraint marks a significant – albeit well trailed – about turn from the ‘boosterism’ of the previous Prime Ministers.   In the medium to longer term, the Chancellor has acknowledged that growth will be key, it is encouraging that the Chancellor has maintained that levelling up will be part of this: more devolution deals, and further deepening of devolved funding to Manchester and the West Midlands as pilots. However without any real accompanying incentives of more funding and new infrastructure, the economic and political reality of how this growth conundrum will be achieved remains to be seen.   Maintaining and improving public services in a recessionary period will be difficult, and it is with trepidation that we await the funding agreements for local government already tasked with the overwhelming challenges of adult social care. The tight spending plans from 2025 onwards imply annual cuts for some budgets of 0.7% per year; for local government this is on top of a long period of ‘efficiency savings’ and could result in even more over-stretched services.   With Government and business investment at a minimum attention within the built environment sector now turns to the Secretary of State to see how planning reforms could contribute to the supply side boost that the economy so clearly needs, but acutely aware there will be less public money available to support it. The need to incentivise and provide a clear pathway for private sector investment has never been greater.       Disclaimer This publication has been written in general terms and cannot be relied on to cover specific situations. We recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Lichfields accepts no duty of care or liability for any loss occasioned to any person acting or refraining from acting as a result of any material in this publication. Lichfields is the trading name of Nathaniel Lichfield & Partners Limited. Registered in England, no.2778116   Image credit: Aswin Mahesh  


Budget 2021: Rishi’s moment of challenge and change
There’s no doubt that Rishi Sunak’s relatively short tenure at No 11 Downing Street has been a challenge. At the time of Budget 2020 (remember that?) in March last year, Sunak had been in the job for just three weeks – and within three of weeks of delivering his statement, the full impact of COVID-19 started to unfold as the country entered lockdown. The ensuing recession – the deepest in the UK for 300 years – means we’ve heard much more regularly from the Chancellor over the past 12 months than might typically be the case, as various phases of the government’s support package have been rolled out, and then rolled out again, under the promise of “whatever it takes”. But the resulting paradigm shift in the fiscal landscape can perhaps most easily be summed up as follows: in March 2020, the Chancellor set aside £12bn to provide support for public services, individuals and businesses whose finances have been affected by COVID-19; the actual cost so far has been around £280bn. Beyond the numbers, the pandemic has, naturally, also stalled much of the government’s wider economic policy agenda, such as the manifesto commitment to “levelling up” areas across the country. Many earlier announcements, such as the planned Comprehensive Spending Review, have also been pared back. So it was against this backdrop that the Chancellor delivered his second Budget this week, which he summed up as a “moment of challenge and of change”. It had been widely trailed that the government would pursue a ‘spend now…but pay later’ approach when faced with the highest level of public borrowing since the Second World War; the effect of the further COVID-19 support measures announced will take the total bill to £407bn. The Chancellor is taking a calculated risk that the economy will be on the mend and growing again at the point that various new tax rise measures start to bite over the next few years. In this respect, the Office for Budgetary Responsibility (OBR) brought some good news in their latest outlook – GDP is now expected to grow by 4% in 2021 and to reach its pre-pandemic level by mid-2022, six months earlier than had previously been expected. The OBR warned, however, that they expect the economy to be 3% smaller in the medium term compared to its pre-COVID path – in part due to recent falls in net migration. But the Chancellor wants more than an economic recovery that is set to autopilot, stating: “it’s not enough to have some general desire to grow the economy…we need a real commitment to create jobs where people are and change the economic geography of this country.” The tone was set for change, including addressing the challenges of long-term green growth and levelling-up. On the latter, Rishi Sunak is starting close to home – by confirming the move of 750 HM Treasury officials to Darlington as part of the “Treasury North” campus. The Budget was accompanied by the publication of Build Back Better: our plan for growth, a policy paper which sets out the government’s plans to support economic growth through investment in infrastructure, skills and innovation – it effectively provides a new framework that supersedes the 2017 Industrial Strategy as the central policy reference point. This paper also details a series of new funding arrangements, and confirmed that the long-awaited UK Shared Prosperity Fund will arrive in 2022 to replace European Union structural funds as they expire after 2022-23. More immediately, government launched a new Levelling Up Fund worth £4.8bn until 2024-25, with a first round focused on local transport projects, town centre regeneration, and culture and heritage – the deadline for competitive submissions by local authorities is 18 June 2021. For this purpose, every local authority in the country has been placed into one of three levels of priority group – as shown on the map below – with preference to be given to bids from higher priority areas based on their need for economic recovery and growth, need for improved transport connectivity and need for regeneration. The exact details of how government arrived at this prioritisation have not yet been released, and a number of criticisms have already been levelled at some of the categorisation reported in the media. Potential candidate projects for funding are expected to align with relevant Local Plans, Local Industrial Strategies or Local Transport Plans. Other key announcements included: the creation of the first ever UK Infrastructure Bank to be headquartered in Leeds that will focus (at least initially) on investments to tackle climate change and support regional economic growth, and that will have a degree of operational independence from government; the latest round of confirmed Town Deal settlements for 45 towns nationally; the designation of eight Freeport locations[1] across the country which will be eligible for tax incentives to attract investment, easier customs processes and simplified planning measures; the terms of reference for a new study from the National Infrastructure Commission (NIC) on how to maximise the benefits of infrastructure policy and investment for towns – with an emphasis on transport and digital – to report by September 2021; and a signal that there could be further change on the way for Local Enterprise Partnerships (LEPs), as government indicated it would be looking at the future role of LEPs, including their geographies, over the coming months and will announce more detailed plans ahead of the summer recess. Ultimately, this was a Budget very much defined by the long shadow of the pandemic on the state of the public finances, even at this moment when there is more confidence about the way ahead and an economy that can start to grow again. But it was also about the Chancellor attempting to kick start the government’s longer-term economic policy programme and delivering against its political commitments.   [1] East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth, Solent, Thames, Teesside. Image credit: @rishisunakmp via Instagram