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Rishi Sunak, in his first speech as Prime Minister, said, “Right now our country is facing a profound economic crisis.” Against the backdrop of high inflation, rising interest rates and weak growth, the Autumn Statement will set out changes to tax and spending policies. The Office for Budget Responsibility (OBR) will publish revised forecasts for the economy and public finances alongside the Autumn Statement. 

The mini budget and reaction

As Chancellor, Kwasi Kwarteng, presented a mini budget on 23 September 2022. He announced significant tax cuts that would reduce Treasury revenues by around £45 billion in 2026/27. He also launched the Growth Plan 2022.

The mini budget didn’t set out a wider plan for the public finances, nor were economic forecasts from the OBR requested for it. A medium-term fiscal plan was promised in “due course”.

Financial markets reacted negatively to the mini budget and investors wanted higher rates of interest for lending to the Government. Despite global events causing economic difficulties, most economists agreed there was a “UK specific component” to this rise in government borrowing costs, which was largely due to the mini budget.

Kwasi Kwarteng was replaced by Jeremy Hunt on 14 October. By the end of 17 October, most of the mini budget’s tax cuts had been reversed by the new Chancellor to “provide confidence in the government’s commitment to fiscal discipline”. Government borrowing costs have fallen back to pre-mini budget levels. However, the UK appears to be paying a ‘premium’ on its borrowing costs.

The medium-term fiscal plan and Autumn Statement

Shortly after the mini budget, 23 November was announced for the medium-term fiscal plan. The date was brought forward to 31 October, largely to calm financial markets. After Rishi Sunak became Prime Minister, the medium-term fiscal plan was moved to 17 November, where it will form part of an Autumn Statement.

It’s likely that the Autumn Statement’s medium-term fiscal plan may change some of the existing targets for the public finances, which were set in January 2022. The Government has an existing target for the debt-to-GDP ratio to be falling in the third year of OBR’s forecasts (the target year is rolling). It’s widely thought that the Chancellor will move the target to a later date, possibly the fourth or fifth year of the forecast.

Government borrowing will need to reduce for the Chancellor to meet his new target. The economic situation has worsened since the OBR last produced a forecast – largely due to Russia’s invasion of Ukraine and soaring inflation. Some of the tax cuts from the mini budget also remain.

The Chancellor has said decisions of “eye-watering difficulty” will be required, both on spending and taxes, to ensure that there is confidence in the public finances. Government departments are drawing up ways to find efficiency savings within their budgets. The Chancellor is “not taking anything off the table, whether that means tax increases or spending reduction”. 

Economic situation

Recent economic developments are characterised by weak growth, high inflation and rising interest rates. Many forecasters, including the Bank of England, predict the economy will fall into recession either by the end of this year or in 2023.

Consumer prices were 10.1% higher in September 2022 compared with a year before. This, along with July 2022, was the highest inflation rate since 1982. As well as surging energy and food prices, so-called “core inflation” – which excludes the volatile energy and food components of the CPI – reached 6.5% in September.

UK inflation

To try and bring inflation down to its 2% target, the Bank of England has raised interest rates from 0.1% in December 2021 to 3.0% currently. Further increases are likely. Reacting to the mini budget, financial markets raised expectations for interest rates to rise above 6% at one stage, before predictions easing recently to below 5%. Economists generally expect official rates to reach at least 4%.

Higher rate expectations have led to higher interest rates on mortgages. This has added to the squeeze on household incomes from high inflation. There have been steep falls in consumer confidence. Prospects for consumer spending, a key driver of economic growth, are therefore weak.

The Autumn Statement seems likely to lead to lower public spending and/or tax rises to reduce the budget deficit. Unusually, this tightening of fiscal policy will occur at the same time as rising interest rates. The combined effect will act as a drag on economic growth over the short term.

Independent forecasters surveyed in October forecast GDP growth of -0.3% in 2023.  This compares to 2.0% when the survey was conducted in February. The Bank of England is more pessimistic, forecasting a 1.5% decline in GDP in 2023.

Forecasts of 2023 GDP growth

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