The sands of time are fast draining away towards the date of the next General Election.
Arguably only this Autumn Statement and the Budget next March provide a beleaguered government with set-piece economic events that have the potential to change the political weather. But it is always worth remembering that the great charm of politics is its sheer unpredictability, so never rule out some unforeseen game-changing event just around the corner…
A quick word on last week’s ministerial reshuffle. Strategically Rishi Sunak has made his choice. He has alienated the more vocal elements of the Conservative Right by sacking the increasingly belligerent Suella Braverman. He will have calculated that with the election pending and no obvious successor in mind, trouble even from that faction will likely be muted in the months ahead. Superficially more puzzling was his apparent attempt to shore-up his position in the Tory heartlands by recalling David Cameron to ministerial office. This return flies in the face of Sunak’s vow only a few weeks ago at the Party Conference that he sought to represent political change; by contrast the presence of Cameron at the top table will be a constant reminder to electors of just how long the Conservatives have been in office. For sure the former PM has always looked the part, but his reputation has not been enhanced in the years since his sudden departure from the frontline after the Brexit referendum. The Greensill issue may yet come back to bite – the Serious Fraud Office is still investigating its collapse and the liquidators may yet call for directors’ disqualification and financial restitution.
Less noticed, however, is that by appointing such a heavyweight to the Foreign Office, Rishi Sunak has given himself the opportunity to focus his attention nearly exclusively on domestic affairs in the key months that lie ahead. I suspect he has already become bored by all the hanging around and time-consuming photoshoots that lie behind international summitry when he would rather be playing to his strengths as a data and details-driven technocrat.
But a return to early-Cameron era Conservatism is not really on the cards – in truth, public sentiment is not on the side of those of us yearning for deregulation, a smaller state and globalisation. The middle ground of UK politics these days is more in tune with the Red Wall coalition tentatively assembled in 2019 by Boris Johnson – economically interventionist and more socially conservative. There is also little sign of any significant appetite on the part of voters to reverse the marked trend of recent years towards higher public expenditure. It is estimated that since the pandemic we have collectively baked in an additional £100bn annually of spending. The relentless demands for yet more public money in health, education, welfare, and local government show few signs of abating, whoever is in government.
At each and every major fiscal event we go through the charade of assessing whether there is ‘headroom’ for tax cuts. The truth is that the magic of compounding means that even small tinkering with in-year output estimates projected over a five-year forecasting period provides even the most orthodox Chancellor with plenty of scope to spend more. The notion of fiscal headroom is a myth at the best of times, and it is especially absurd in the current environment. Check out those debt-to-GDP figures – currently running at a post-war high. Look at the state of the public finances – the national debt has tripled since the financial crisis of 2008 and is still rising fast. We are continuing to live well beyond our means, and it is future generations of Britons who will be paying the bill.
That is not to say that the government’s strategy is entirely flawed. Until recently my working assumption for the most likely date of the next election was October 2024. However, economic data in recent weeks suggests that growth will flatline over the next year or so and that the long-overdue series of rises in interest rates that began two years ago is unlikely to be reversed any time soon. The conventional forecasting wisdom, which in recent times has tended to be overly pessimistic, now suggests that the UK economy may even experience a mild recession in Q2/Q3 of next year. Needless to say, this would be an unwelcome backdrop to a General Election campaign, which is why I wonder if Sunak may be tempted to go to the country sooner. It was notable that the reduction in employee National Insurance announced in the statement will be rushed in from January rather than, as is usual, taking effect from the beginning of the next tax year.
So, the emphasis in the Autumn Statement on easing the regulatory and fiscal burden on businesses, especially in the SME sector, should have come as no surprise. Sunak and Hunt, himself a highly successful small businessman before becoming a politician, have been particularly stung by recent surveys suggesting that the UK business fraternity is fast giving up on the Conservatives, whose membership still regards being the ‘party of business’ as an integral part of its DNA.
Brexit continues to cast its long shadow over UK politics. Most individuals have long since made up their mind about whether or not it has been a good thing; it is probably the single most important ‘achievement’ of the Conservatives’ spell in office. But the Treasury, in particular, feel that the UK has hitherto failed to take advantage of the full freedoms to business afforded by Brexit. This is the thinking behind much of the incentivisation for investment spending on plant, machinery and training set out in the Autumn Statement. Full expensing of these items against corporation tax may be long overdue, but it is welcome nonetheless – and the same can be said for many of the other measures introduced in direct response to incessant lobbying from companies and firms.
In the world of financial and professional services the MOU between the UK and EU on future co-operation signed as we formally left the bloc in 2020 has in essence left EU autonomy unfettered. The European Commission has sought to set financial market standards and use its economic scale to acquire global standing; the City of London and Treasury have now sought to use this Autumn Statement to begin a fightback. Firstly, over state aid provisions – as these no longer apply to the UK, the overriding goal is to make the UK a manifestly more attractive destination for inward investment. The uncertainty over the April 2025 sunset clauses for Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) will soon be resolved (although the Northern Ireland situation – as it is in the customs union – threatens to complicate this).
The reforms to private pension investment in UK companies was first highlighted in the Mansion House speech in July and it is anticipated that primary legislation will be in place before next spring’s budget. The government sees this as game changing for long-term and sustainable infrastructure investment. This approach stands in stark contrast to the PFI/PPP model under the last Labour government, now so discredited as being such poor value for money and with a long tail of liability attached.
A matter of weeks ago it appeared as if there would be no scope for personal tax cuts. However, the sense that a corner has been turned in vanquishing inflation (something that those of us who lived through the 1970s would give this administration much credit for focusing so much attention on over the past year) has emboldened the Treasury to sharply reduce rates of employee national insurance. However, it would be best to see this as only a down payment with the Chancellor seeking to return to the tax-cutting theme as soon as March’s budget by reducing headline levels of both income tax and IHT. Political opponents will argue that this is playing largely to the gallery of Conservative Party supporters, but in an election year it is unwise to get overly pious about such measures.
It was always in the realms of wishful thinking to imagine that the Autumn Statement would radically and instantly change the political weather. But the overriding reputation of the two leading figures in the UK government is for diligence and reliability. The Autumn Statement is designed to do the right thing and lay some prudent foundations for UK business – regardless of who may be in office this time next year.
Whilst some Conservative commentators are already suggesting this was a missed opportunity, the truth is that Sunak and Hunt had far less scope for radical action than their critics might assume. The future financial projections suggest that the room for manoeuvre for the Treasury will become even only narrower in the foreseeable future.
Written on 23 November 2023 by The Rt Hon Mark Field, former Member of Parliament (MP) for Cities of London and Westminster and Consultant at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.