The chancellor, Jeremy Hunt, will set out the government’s plans for tax and spending on Wednesday in his much-anticipated autumn statement. Meanwhile, the Office for Budget Responsibility (OBR) will publish updated economic forecasts and an assessment of the government’s finances for the next five years – running well beyond the next election. Here is what to expect.
The OBR, which is independent of government, is expected to raise its forecast for average inflation this calender year from 6.1% to nearer the Bank of England estimate of 7.4%. Inflation in future years will also be upgraded, boosting tax receipts, but adding to welfare bills and the costs of government spending departments.
The OBR chair, Richard Hughes, is also expected to say that the spending deficit improved after a rise in tax receipts, mainly due to higher than expected inflation over the last year.
Hunt could have as much as £25bn spare and still bring down borrowing over the life of the forecast. A self-imposed rule forces Hunt to show annual borrowing falling as a proportion of gross domestic product (GDP) in the fifth year of the OBR’s five-year forecast.
The chancellor is expected by some analysts to inject about an extra £12bn into the economy from next April – which is the equivalent of 0.5% of GDP – through a range of business subsidies, tax cuts and welfare rises. This compares with the extra 2.5% of GDP that Joe Biden’s administration pumped into the US economy this year, mainly to kickstart investment.
Hunt will say the economy has turned a corner after three years of being battered by Covid-19 and the shock waves from the Ukraine war. He will also say the halving of inflation means households can begin to recover some of their lost spending power.
However, a sluggish economy that is expected to flirt with recession next year offers the chancellor little hope of a pre-election recovery.
Traditionally, higher growth would solve most of his problems because it would force the OBR to revise up personal and corporate tax receipts and limit his outgoings on unemployment benefits. But the Bank of England is waiting to pounce with higher interest rates should there be any signs that consumers are about to spend again.
The central bank believes the UK’s business community, unlike firms in the US, cannot react to higher spending with higher production, only higher prices.
Hunt is under pressure from backbench MPs to reduce personal tax rates, as his predecessor Kwasi Kwarteng promised last year. A reduction in the standard rate from 20p in the £1 to 19p has been floated.
Personal allowances have been frozen since 2021, pushing more people into higher-rate tax bands. The freeze will push the overall tax rate to 37% of GDP by 2027, the OBR said in March, the highest since the second world war. High wage rises this year in response to soaring inflation have increased the government’s tax receipts further.
Welfare benefits for working age people will rise in line with the 6.9% inflation rate in September. There was speculation the chancellor would use October’s 4.6% inflation figure, saving him £2bn, but he is now expected to adopt the higher amount.
Hunt is also promising a “back to work plan”, designed to help up to 1,100,000 people stay healthy, get off benefits and move into work.
Additional support comes alongside tougher sanctions for people who don’t look for work, as part of “the next generation of welfare reforms”.
Employment experts have welcomed the extension of support for people out of work – NHS talking therapies, individual placement and support, restart and universal support – but said the project is undermined by threats of sanctions that will encourage GPs, debt charities and local authority advisers to shield vulnerable people from getting involved.
Hunt is expected to confirm that the state pension triple lock will stay in place. It guarantees pensions rise by inflation or earnings over the previous year, or 2.5%, whichever is the highest. The total pay figure in September proved to be the highest and will be used to increase the state pension by 8.5%. There had been speculation that the uplift could be reduced by excluding bonuses, but the chancellor is expected to leave the formula unchanged.
Building on his Mansion House speech, Hunt will say he wants to encourage UK pension funds to invest more in British companies.
The chancellor is also planning to unveil “pot for life” reforms that will give workers the right to nominate the pension scheme their employers pay contributions into, ending the difficulties faced by those who accumulate multiple retirement funds after moving jobs.
The full expensing of business investment, which allows firms to offset spending on plant and machinery against profits, and is due to expire in March 2026, could be extended or made permanent.
There will also be more details about the chancellor’s plan to spend almost £1bn creating 12 investment zones in eight areas, first outlined in March.
These zones are similar but separate to the freeports created when Rishi Sunak was chancellor.
Hunt will say the latest zone ready for takeoff is in West Yorkshire with an emphasis on biotech and pharmaceutical companies, “creating more than 2,500 new jobs over five years across the region and unlocking over £220m of investment”.
The zones provide tax subsidies and looser planning rules that have prompted protests by environmental groups concerned that the chosen sites will become green deserts.
Hunt said last week that a review of productivity across the public sector found civil servants waste a whole working day each week on admin.
He said “new tech and cutting admin workloads would save millions of working hours, including around 750,000 policing hours every week”.
Hunt will also mention that artificial intelligence is already helping the NHS treat stroke victims and build high-quality lesson plans for teachers.
Mindful of the need to push ahead with net zero investments, the chancellor will announce a £4.5bn fund to promote green technologies.
The car industry will be the biggest single beneficiary, though eight sectors “key to economic growth” will also benefit, reinvigorating the levelling-up agenda.