How will the Autumn Statement impact your investments?

Our live coverage of the Autumn Statement is now complete. Read on to find out what was said, what the announcements could mean for your money and how markets reacted.

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First up, phew…

The Chancellor has got through an Autumn Statement without causing mass market panic, so already that’s an improvement on this time last year. The FTSE was down slightly and the sterling flat against the dollar.

Jeremy Hunt went into the statement with an anticipated £25bn of cash to play with, courtesy of the ‘stealth tax’ imposed in the spring Budget by the freezing of the income tax threshold. Inflation and wage growth alongside this tax threshold freeze has led to fiscal drag, which means more people are paying tax at a higher rate, thus topping up the government’s coffers and giving some financial headroom for tax cuts.

That’s good news for those playing politics. There is a general election next year and the government has been in need of some positive news to share with potential voters. The measures set out in this statement feel like an attempt to appease the population before they head to the polls.

Here are mine and Paul’s thoughts on some of the highlights:

Business tax updates

In what is rather generously being called the “biggest business tax cut in modern British history”, Hunt has announced a permanent extension of the full expensing scheme which was due to end in 2026.

Under the scheme businesses can deduct all spending on IT equipment, plant or machinery from taxable profits, saving them an estimated £9bn in collective taxes every year.

But there is no reduction in the overall corporate tax rate (currently sitting at 25%) which many companies in the UK crave. Hunt says that the corporate tax rate is currently the most generous in the G7, but proponents for a lower corporate tax rate argue that companies are being incentivised to move to countries where corporate tax rates are lower. It’s an especially pressing problem in Northern Ireland where, just over the border, companies pay a corporate tax rate of 12.5%.

The self-employed will be pleased to see a removal of the compulsory Class 2 National Insurance and the cutting of the Class 4 National Insurance from 9% to 8% - measures that are expected to save 2 million self employed people an average of £350 per year.

Reduction in National Insurance

The level of the cut in National Insurance was the only real surprise in this statement and even then, it wasn’t much of a surprise given the press have been talking about a potential cut for several days.

The Office for Budget Responsibility (OBR) forecasts for growth have given Hunt more headroom and having had his plans confirmed by the OBR (a big error made by Kwasi Kwarteng last year), Hunt has been able to cut the main rate of National Insurance from 12% to 10% from January 2024, ahead of the April budget.

This cut will would benefit employed people (public and private sector), putting more money in their pockets, which tends to be spent immediately each payday for many, especially at the lower end.

This measure should therefore help fuel a consumer spending recovery.

It is worth noting that not everyone would benefit from the NI reduction. Retired people don’t pay NI, and many self-employed circumvent it by paying themselves mainly in dividends through a limited company. Whereas a (say) 1p reduction in the basic rate of income tax would benefit everyone in those groups too.

It’s also worth noting “fiscal drag” (when higher inflation and consequent pay rises pull more people into higher income tax bands). Combined with personal allowances for income tax having been frozen for several years, this has created a boom in income tax receipts for the Government. So the NI cuts announced today are just handing back some of the extra tax they’ve already taken from us!

Living wage and pacifying to pub sector

The government announced a large increase in the National Living Wage ahead of Wednesday’s statement. From April next year the minimum wage for employees over 23 years old will rise to £11.44 from £10.42 previously. And, for the first time, 21 and 22 year olds will be included in the National Living Wage age bracket.

As you can see from their table below, these are inflation-busting rises which seem completely at odds with the Bank of England’s policy of higher interest rates to tame inflation.

As you would expect, there have been howls of protest from the hospitality sector, which along with retailers, will be forced to fund these pay increases. The hospitality sector in particular books a large percentage of its costs from staff wages. Sector leaders, such as the CEO of Loungers (LON:LGRS) have already said this will force further price increases to customers, fuelling inflation. They also remind us that this is not taxpayer money - these big increases in wages have to be funded by employers.

Another consideration is that all levels of workers seek to maintain the pay differentials. So a big increase from the bottom level of pay naturally tends to force employers to pay everybody further up the pay scales more generously too.

This feels like another desperate bribe of the electorate, rather than part of any “long term economic plan”! But let’s not stray into politics, although it undeniably does have considerable bearing on policies when elections are looming.

But the pub sector specifically did receive some good news to (slightly) offset the challenges caused by an increase in the NLW. The Chancellor has decided to freeze alcohol duty again until August 2024 - good news for the companies in the pub sector to build on a decent year of recovery. Fuller Smith & Turner (LON:FSTA) and J D Wetherspoon (LON:JDW) have enjoyed strong share price momentum in the last year, although shares are still way down on their pre-pandemic levels. Valuations are still stretched as rising costs challenge the price to earnings ratios - something that won’t be helped by the increase in the NLW. Young & Co's Brewery (LON:YNGA) - which, last week, confirmed its proposed takeover of its Aim-traded peer, City Pub Group - looks like the best value opportunity in the sector. It’s a high quality operator with a price to earnings ratio of 16 times - well below historic levels.

Capital Market Reforms

In 1986, Margaret Thatcher’s government launched a campaign to encourage the British public to invest in newly privatised British businesses. British Gas was at the heart of that campaign and the topic of a series of adverts encouraging the public to tell their friends about the opportunities of the IPO. “If you see Sid, tell him,” went the tagline. And people did. An estimated 1.5m people invested their £675 personal allowance in the new shares and the company listed at a valuation of £9bn.

Today, Jeremy Hunt wants to “get Sid investing again” and thinks that a retail sale of Natwest shares will help with that.

I am not so sure. In his 2021 review, Lord Jonathan Hill pointed to the dominance of the financial sector in the UK as one of the reasons why the attractiveness of the FTSE has fallen in the last decade. To get more people investing, the market needs to attract more innovative businesses. You can read more about Megan’s thoughts on the need to stimulate UK markets, here.

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In his conclusion the Chancellor stated proudly that this was “an Autumn statement for growth”. Are we sure about that? Or was it an Autumn statement for a government heading into a general election? We feel like it was the latter.

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Appendix: Notes from the statement

Support families cost of living - most acute for poorest families. Benefits +6.7% in April 2024, in line with Sept’s inflation. Rent can be half of lowest incomes, so unfreezing local allowance limit. Pubs - freezing duty again? Yes all alcohol frozen until Aug 2024. Pensioners - triple lock - honour commitment in full, not tinkered around edges. Full 8.5% increase to state pension to £221 pw, £900 extra pa.

Govt Debt - was previously predicted to rise to 100% of GDP by end forecast. Economy has outperformed. Headline debt now forecast 94% GDP by end forecast period. 2nd lowest debt:GDP in G7. Borrowing is deferred tax (Lawson). Public sector borrowing must be less than 3% of GDP.

Disciplined approach to public spending. Will meet NATO commitment to spend 2% of GDP on defence.

Economic growth - faster growth in UK since 2010 than many large competitors (incl France & Germany). Economy forecast to shrink 1.1% this year, but has actually grown. 1.8% larger than pre-pandemic. 0.6% growth this year, 0.7% in 2024 - per OBR.

Need higher productivity, which needs higher business investment.

Boost business investment by £20bn pa. Unlock investment, supply side reforms -

Skills - 9m adults have low literacy/numeracy. Want to increase apprenticeships (but only £50m).

Planning - too slow. Pay more for faster decisions from LAs (major projects) service to be offered. Housebuilding - environmental blocking of 100k new houses. More decisions to unlock housebuilding.

Clean energy - too slow to access electricity grid. Cut delays by 90% with new measures. Offer discounts to electricity bills for local residents. £90bn over 10 years extra investment unlocked.

Overseas inward investment (Harrington Report) - accept all recommendations.

Pension funds - drive flow of capital to growth companies. New right to have employer contribs paid into existing personal pension - so one pot for life.

Capital market reforms - NatWest retail share offer. Get Sid investing again!

Tech sector - 3rd largest in the world. Life sciences - biggest in Europe. 3rd largest renewables in Europe.

AI - heart of future growth. Additional £500m.

Creative industries - Europe’s largest TV/film. Barbie filmed in Watford! TV tax credits - call for evidence on how can be improved.

Vaccines developed in UK. Simplified R&D tax credits. New innovation centre, Fleming.

Strategic manufacturing sectors - eg electric vehicles, aerospace, life sciences £4.5bn over 5 years (?) - targeted investments.

Manufacturing & clean energy.

Extend tax relief from 5 to 10 years in free ports & investment zones. Catalyst for £3bn private investment.

Small business - end scourge of late payments. 30-day terms required in public sector contracts. Contractors must demonstrate they pay in 55 days, reducing to 30 days.

Business rates - a third taken out altogether. Frozen for 3 years. Can’t do temporary support forever. Freeze the small business multiplier (but not larger properties). 75% discount for retail & hospitality for another year. Cost £4.3bn - to help small pubs & shops.

Self-employed - reform & simplify taxes. Major reform - class 2 NICs flat rate, £3.45 pw. Gives state pension entitlement. Abolishing class 2 altogether. Save self-employed £192 pa, with access to benefits maintained in full. Cuts tax for 2m self-employed people.

Class 4 payable at 9%. Cut by 1% to 8% from April 2024.

Super deduction for large businesses. Full expensing for 3 years introduced earlier this year. Making it permanent would be transformational, big businesses say. Costs £11bn pa. This is now affordable, so will make full expensing permanent. Largest business tax cut in history. Lowest Corp Tax rate in G7, and now most generous capital allowances too.

Decisive step to closing productivity gap.

Incentives to work - welfare - 7m adults not working. Back to work plan. Reform sick notes. OBR says will get 200k people back into work.

Low pay - low paid have seen 25% real terms increase since 2010.

Living Wage - accepting £11.44 recommendation, up 9.8%. As expected.

OBR forecasts give him more headroom (doubled).

OBR has confirmed his plans (this is where Kwartang went wrong)

High employment taxes disincentivise hard work.

12% NI £12.75-50k (ish) + 20% PAYE = 32% marginal tax rate.

Will cut main 12% employee NIC rate. Cut main rate by 2% to 10% - bring in from Jan 6, 2024, not April. Big boost to consumer spending.