PREVIEW: UK Autumn Statement Thursday November 17th at 11:30GMT/06:30EST

BACKGROUND: After the disastrous “mini-budget” in September and the subsequent removal of PM Truss and Chancellor Kwarteng, Chancellor Hunt will be presenting a full Autumn Statement on November 17th. Despite short-term UK borrowing costs stabilising since the bloodbath seen in late September and early October, the Chancellor will need to present plans to address the GBP 50bln “black hole” in its finances. Accordingly, Chancellor Hunt will need to embark on a programme of tax hikes and spending reductions. In terms of the split between spending and taxation, reporting from the FT (7th Nov) stated that the Chancellor currently intends to cut GBP 33bln from public spending while raising taxes by about GBP 21bln.

TAXATION: It’s worth noting that Hunt has already scrapped Truss’ plan to hold corporation tax at 19% with the rate set to climb to 25%, whilst the basic rate of income tax is to remain at 20% (vs. the 19% proposed by Truss). Elsewhere, Hunt previously declared he would not reverse the scrapping of the National Insurance increase; it remains to be seen whether this will still be the case. In terms of other taxes that Hunt could look at, The Times reported that Hunt could opt to “maximise revenues from the windfall tax by increasing the rate from 25% to 30%, extending the levy until 2028 and expanding the scheme to cover electricity generators”. Pantheon Macroeconomics suggests that the Treasury could raise GBP 20bln by raising VAT, however, this is an unlikely route given that it would further fan the flames of inflation. As such, Pantheon believes that a bulk of the hole will need to be filled by income taxes. Recent reporting in the Telegraph stated the government could raise the 45% top rate or lower the GBP 150k annual income threshold at which it kicks in. Given that higher earners will likely have savings which they can draw on to maintain consumption, this could be one of the more favourable options for the Chancellor. Regardless, Hunt has cautioned that everyone will end up paying more taxes following the statement. Elsewhere, other measures touted include inheritance tax and reducing the tax-free allowance for dividend income.

SPENDING: From a spending perspective, despite the needs for cuts, a lot of focus will be on any announcements surrounding the Energy Price Guarantee. In October, Hunt announced that the Energy Price Guarantee would run until April 2023, at which point, it would be reviewed. Reporting over the weekend suggested that Hunt plans to commit around GBP 20bln to extend the energy price guarantee scheme by six months from April and is eyeing a multi-billion-pound package to shield pensioners and benefit claimants from the increases in power bills, according to The Times. Sticking with pensions, the general expectation is that the triple lock will be maintained until at least the next election; albeit, PM Sunak has recently refused to confirm the policy will be maintained. With regards to spending cuts, the Chancellor will need to ensure that the debt-GDP ratio will decline in three years’ time. Pantheon Macroeconomics forecasts a “7.4% increase in nominal spending between 2022/23 and 2025/26” which “probably equates to a real-terms decline of about 1.2%”. In terms of the levers the Treasury could pull, Pantheon suggests lowering public sector investment would be the easiest option for the government, however, this would have negative implications for the economy given the multiplier effect of such investment. Elsewhere, Hunt could opt to tweak the overseas aid budget and find additional restrictions in day-to-day department spending to the tune of GBP 4bln.

FORECASTS: For the accompanying projections, Capital Economics suggests the focus will be on three factors 1) the depth of the recession in 2022/23. 2) Whether the OBR offsets downward revisions to the near-term GDP growth forecasts with upward revisions to the forecasts for later years. 3) Forecast for the economy’s potential growth rate in the medium term. Capital Economics suggests that its best guess is “the OBR will pencil in a peak-to-trough fall in GDP of 2.0%, it will assume little in the way of catch-up growth and that it will leave its medium-term forecast for real GDP growth unchanged at 1.7%”.  In terms of specifics, Capital Economics expects the OBR to forecast Real GDP growth of 4.2% in 2022 (vs. March view of 3.8%), -1.5% in 2023 (vs March view of 3.8%) and 1.0% in 2024 (vs March view of 2.1%). Elsewhere, Capital Economics expects the OBR to raise its “pre-new measures” borrowing forecast for the current FY from GBP 99bln to GBP 207bln, whilst commenting that before the inclusion of new measures, “the underlying debt to GDP ratio is on a decisive upward path”.

GILT REMIT: Consensus, according to Reuters looks for 22/23 Gilt issuance of GBP 185bln vs. the September 23rd projection of GBP 193.8bln. 23/24 seen at GBP 238bln.

17 Nov 2022 - 06:56- Research Sheet- Source: Newsquawk