When is a tax cut not a tax cut? The Autumn Statement digested

This is an audio transcript of the Money Clinic podcast episode: ‘When is a tax cut not a tax cut? The Autumn Statement digested’

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Claer Barrett
When is a tax cut not a tax cut?

Jeremy Hunt
I said I would cut taxes when we could, but only responsibly and only in a way that did not fuel inflation.

Claer Barrett
The big news in the Autumn Statement was that National Insurance bills will come down in January for 27mn workers. But as we’ll explain, overall taxes are still going up. There’s already pressure on the government to do more to ease the effects of these stealth taxes. And our new economics editor is here to explain exactly how these have been crimping your take-home pay. Plus, important changes on the horizon for ISAs and workplace pensions. And some surprising news for investors if they could understand what the chancellor was talking about.

Jeremy Hunt
It’s time to get Sid investing again. (Ye chorus in Parliament)

Claer Barrett
Welcome to the Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s slightly hoarse consumer editor.

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With a general election around the corner. November’s Autumn Statement setting out the government’s spending and taxation priorities for the year ahead was even more politically charged than usual. And on today’s show, our guest experts and I will spell out exactly what this means for your money. Let’s meet them. And to break the ice here, how they would sum up the Autumn Statement in a word. Starting with Katie Martin, the FT’s markets editor. What’s your word and why?

Katie Martin
My word is ‘Whew!’ (laughter)

Claer Barrett
And why do you say that, Ms Martin?

Katie Martin
There was considerably less drama and market turmoil in this Autumn Statement than there was in a similar event this time last year.

Claer Barrett
Yes. How can we forget?

Katie Martin
We can never, ever forget.

Claer Barrett
The disastrous Mini Budget. Now, Sam Fleming, the new FT economics editor, come all the way from our bureau in Brussels. What would be your word to sum up the Autumn Statement and why?

Sam Fleming
Am I allowed three words sort of . . . 

Claer Barrett
Go on, seeing as your new.

Sam Fleming
Sleight of hand.

Claer Barrett
Sleight of hand.

Sam Fleming
Sleight of hand. So a big headline-grabbing, in fact a couple of big headline-grabbing tax cuts with the business expensing rules that Jeremy Hunt extended, plus the reduction in National Insurance contributions rates. But at the same time, the tax take going up perpetually over the coming years.

Claer Barrett
Good, well, stay right there. We’re gonna come back to that point first. And finally, Rafe Uddin, FT politics reporter who has been writing lots of our stories about ISAs. How would you sum it up?

Rafe Uddin
A time bomb. So some welcome assurance for young ISA savers, novel proposals for how pension pots are going to be managed. But tax cuts set a trap for Hunt or a future chancellor as difficult decisions lie in wait over public services after the next election.

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Claer Barrett
OK. Well, let’s start our panel with the tax cut that we did get and why it won’t be as generous as the chancellor might have made it sound. Let’s listen again to what Jeremy Hunt had to say.

Jeremy Hunt
High employment taxes on 27mn people working in the public and private sectors disincentivise the hard work we should be encouraging. If we want people to get up early in the morning, if we want them to work nights, if we want an economy where people go the extra mile and work hard, then we need to recognise that their hard work benefits us all. So today, Mr Speaker, I’m going to cut the main 12 per cent rate of Employee National Insurance (Ye chorus in Parliament) by two percentage points (Parliament reaction) from 12 per cent to 10 per cent. That change will help 27mn people. It means someone on the average salary of £35,000 will save over £450.

Claer Barrett
Sam, his rhetoric sounds good, but why have higher taxes been such a drag on our incomes?

Sam Fleming
Well, this is this concept of fiscal drag, and the idea is that the chancellor has been freezing thresholds on income tax and National Insurance contributions rather than raising them in line with inflation. And the upshot of that, when people’s wages are going up, as they are at the moment, be in relatively high inflation, very high inflation environment as people start tipping into higher . . . first of all, tipping into having to pay tax at all and then tipping into higher tax bands if they’re on higher incomes. So and the numbers which came out during the Autumn Statement from the Office for Budget Responsibility, which is the watchdog which oversees the Treasury and its fiscal outlooks, were quite striking. So between 2022 and ’23 and ’28 ’29, those two fiscal years, this set of threshold freezes which are under way means that 4mn additional individuals will have to pay income tax. Three million more will have moved into the higher rate of income tax and 400,000 more into the additional rate income tax.

Claer Barrett
So just to break that down, that’s 3mn more people who will go through that £50,000 barrier, which means they’ll face income tax of 40 per cent on anything they earn above that. And then you say 400,000 going into the additional rate tax. Now, you used to have to earn 150 grand a year before you got taxed at 45 per cent. But at the last budget, he brought that down, didn’t he? So you only need to, you only, repetitive, you only need to earn £125,000 now to be a 45 per cent taxpayer. So millions of people are gonna be paying more tax.

Sam Fleming
Exactly. And so the numbers that the OBR set out were interesting. They showed that the tax burden, which is the amount of tax as a share of the overall economy, is going to continue rising even after the measures that the chancellor introduced and reach a postwar high in the next five years of 38 per cent of gross domestic product, 38 per cent of the economy. So the tax take is growing. Now, that’s not to say that it’s not welcome news for people if National insurance contributions are being cut. The main kind of national and current insurance contribution is being cut by two points or indeed the changes to self-employed National Insurance. These clearly mean for those people, they will be paying less in tax than they would otherwise. But as we said, the bigger picture is their overall tax burden is going up.

Claer Barrett
And for those of you thinking, well, how much will this measure actually save me? From January, as we heard Jeremy Hunt say, the average worker on a salary of 35k, they’ll save about £450 a year. A self-employed person could save up to £350 a year. And if you earn more than 50 grand, you’re saving is actually gonna be bigger, up to £750 per year. But Sam, I’ve had to explain that because National Insurance is a bit harder to understand than income tax. Why do you think the chancellor picked National Insurance to make the cut to, rather than saying, I’ll just take a penny off income tax?

Sam Fleming
Well, I think, first of all, by targeting National insurance, you are targeting people who are earning a salary. So income tax applies to all people’s earnings. For example, if you own a house and get rent on it, you will pay income tax on that. Whereas National Insurance applies to people who are earning a salary or who are self-employed indeed as well. So I think that by targeting earned income in that sense, it is a more attractive angle for the chancellor to be taking.

Claer Barrett
A tax cut for workers . . . 

Sam Fleming
Exactly.

Claer Barrett
 . . . as he said. Well, Katie, after the huge unfunded tax cuts in the Mini Budget sent financial markets into a tailspin a year ago, as you mentioned, there was a lot of pressure on Jeremy Hunt not to go too far. How did markets react this time around and what’s that telling us about the future?

Katie Martin
So the market reaction this time around, in stark contrast to the Mini Budget from Kwasi Kwarteng and Liz Truss last year, was very mild. And that is the market’s way of telling you that this is a much more sensible, predictable way of running national finances. There were no kind of big stink bombs in there to send the market haywire because clearly, policymakers, you know, governments have learned that you mess with the bond market at your peril. And if you really hit bond prices and send yields scurrying higher, then that raises mortgage repayment and debt repayment costs for everybody and makes borrowing much more expensive for the government itself. So we haven’t had that this time around. That said, the sorts of, if you like, relative tax cuts that we’ve seen — the measures that Sam was just talking about — do mean that some parts of the market sort of, you know, analysts and economists have bumped up growth forecasts very slightly. So maybe for next year we’re looking at 0.7 per cent growth rather than 0.6 per cent growth. That’s the target from Goldman Sachs. So it’s very, very marginal. At the margins, that means that it’s gonna be somewhat more difficult for the Bank of England to start cutting interest rates this . . . potentially some other central banks. Now it is very marginal, but that’s one impact that we’ve seen. The other potentially bigger impact that we’ve seen is that the gilt investors, so UK government bond investors, had expected a pretty sizeable cut in the amount of gilt issuance that we’re going to see from the UK government next year . . . 

Claer Barrett
This is the government raising money to borrow.

Katie Martin
Exactly. As the supply of new bonds that we have coming on to the market, it’s the government borrowing. People have expected quite a sizeable cut to that target and actually they got barely any cut at all. And so this constant kind of flood of new debt hitting the markets, this constant new supply in the market parlance, means that gilt yields have bumped up a little bit higher. So that’s hit gilt prices very slightly and pushed up the yield on them slightly. And this is a reminder that every pound extra that the government wants to borrow in the coming years is going to cost them that bit more every single time. So this higher for longer regime that we’ve got, where interest rates are kind of stuck at relatively high levels, just means that government borrowing costs and everybody else’s borrowing cost — whether you’re taking out a mortgage or taking a loan — is just going to be that bit higher. And that really gives the government very little wriggle room.

Claer Barrett
Well, excellently explained there. Now to both of you, why has the chancellor directed so much of his limited firepower at cutting taxes for businesses? Now, other than the FT’s front page, it didn’t get much play on other front pages or on Fleet Street, and it might not appeal to listeners as much as a personal tax cut. But why does it matter?

Sam Fleming
The answer is that the government genuinely thinks that this measure will boost the economy. That will raise investment. And one of the big problems the UK has is a relatively low rate of business investment compared with a lot of other countries in the OECD and the G7. So low investment by businesses means relatively low productivity growth and ultimately that means low growth in living standards. It’s a measure which will pay off over the long term. And so in the sense of the very short time horizons that politicians often operate under, it’s a welcome move because ultimately it’s a gamble that although you may not win a lot of votes out of it in the longer term, it’s in the interests of the economy. Now, economists will debate endlessly whether it really will pay off and just exactly how much it might raise GDP or economic output over the longer term. But it does appear, at least to be a business measure, a measure which is genuinely designed to improve the longer term prospects of the economy.

Claer Barrett
Katie, anything to add?

Katie Martin
I mean, no, not, well, not much, except for the fact that, you know, just as Sam was outlining there you know, that the absolute focus for the government here is growth. You know, none of the rest of it makes sense unless you can get some economic growth. You know, inflation is going to stay high for lots of, kind of big, long-term reasons that are very difficult to get over. The only way to balance the books really is to make sure that growth is still motoring along. And that’s very much the focus of what he’s doing. You know, similarly, you know, trying to get more investment into companies, into stock markets. This is all kind of pushing in the same direction, which is trying to get growth firing and which is currently really not happening.

Claer Barrett
Hmm. Well, let’s see how successful those measures are. Now Rafe, to bring you in: the timing of this national insurance cut, which is being rushed through for January — you know certainly that’s the ambition, see how HMRC gets on with that — has prompted a lot of speculation about the Chancellor’s intentions for a potentially an early election next year.

Rafe Uddin
I mean, it really screams his decision to sort of boost workers’ January paycheques means tax cuts land in workers pockets with enough time for it to be felt before headlines shifts somewhere else to what’s next a pre-election budget. The speculation of an early spring budget — Hunt hasn’t shut down the idea — what it could mean is potentially getting further cuts through in time for April paycheques ahead of a May election. Laura Trott, the newly appointed chief secretary to the Treasury, speaking to the BBC over the weekend, was particularly clear about what the, a NI cut meant. She sort of went on to say, forget about fiscal drag. This is really a decision made for, you know, average earners. And there’s a really sort of neat way of describing average earners. Voters. The only problem is that polls have only narrowed slightly after the Autumn Statement and for government — so far behind, about 20 points behind the opposition party — there’s never gonna be a right time to call an election, So it might come in May, it might come in October. It could come next in 2025. We just don’t really know yet.

Claer Barrett
Let me just briefly mention young people. This is a point I made on our Political Fix podcast this week. There wasn’t much in it for young people having a lot of hope beforehand that we might see some kind of measure possibly for first-time buyers. Lots of people campaigning for there to be reform for the Lifetime Isa — that’s a tax free account where young people can save up for a housing deposit. Lots of them have been caught out by the maximum property price cap of £450,000. Now Rafe, it turned out on the day, nothing like this happened. What might we possibly get in future?

Rafe Uddin
So hopefully changes there could come in the Spring budget.

Claer Barrett
So you think there’ll be more in it potentially for younger voters in the Spring budget?

Rafe Uddin
I think — maybe that’s wishful thinking — but I think providers and savers have really expressed a genuine interest in having something for young savers, particularly on homebuying. The only issue is that it might just sort of bump up house prices because we don’t have enough housing supply.

Claer Barrett
Well, certainly Sam, in case you . . . I mean, housing is obviously the number one issue for younger voters. I mean, do you think that we will see anything to help younger generations in the future budget?

Katie Martin
One thing that Jeremy Hunt really can’t do anything about is that we still have lots of people, brackets, myself included, luxuriating on mortgage rates from mortgage renewals that we did around sort of 2020, 2021 at lovely low rates. Much higher rates on our mortgages are going to kick in at some point next year. Again.

Claer Barrett
Over a million people.

Katie Martin
Yes, over a million people. I’m one of those million people. And it’s going to hurt pretty badly. There’s nothing Jeremy Hunt can do about that. And that’s all about this higher interest rate environment that we’ve got.

Claer Barrett
And we also wait to see what further news there might be on when the childcare measures that he outlined at the last budget will be implemented. I was sad to see that we didn’t get more clarity on that. Now, if you want to hear more about the politics of the Autumn Statement, do download the latest episode of the FT’s Political Fix podcast presented by my colleague Lucy Fisher and featuring insights from FT’s political editor, George Parker.

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So now we’re going to cover some of the biggest takeaways for investors in the Autumn Statement. Starting with some very promising news for listeners who like to trade fractional shares in their tax-free stocks and shares Isa accounts. Rafe, tell us the good news.

Rafe Uddin
Right so I mean, the statement contains some really welcome news for young savers who hold fractional shares, a portion of a single share in an Isa. This isn’t permitted in current rules. And what that meant posed a problem for lots of young savers who did hold fractional shares and were worried they either have to sell out or lose all benefits associated with holding these types of shares in an Isa. It would narrow their choice down a fair bit, and it mostly mean that they could only really access tracker funds.

Claer Barrett
Yeah. Well, we await more news on how that’s all going to play out. But a couple of other bits of tidying up of the Isa regime, which could help listeners as well in years to come.

Rafe Uddin
So Isa system is also going to be able to pay into multiple accounts in a single year for the first time from April next year. So this takes some of the headache of managing an Isa and offers people a lot more flexibility.

Claer Barrett
Yeah. So instead of having to transfer from a cash or a stocks and shares product to another one and waiting for that money to go over in the future, you could just open another one and move the money in, or have two different stocks and shares Isas with two different providers who offer you two different things. For example, a provider like Vanguard, they do an Isa, which has got very, very low fees. But if you pay into that one, then you can also have a stocks and shares Isa along the lines of the apps that you’re talking about where you could buy a very small slice of Apple or Tesla and perhaps have a small proportion of your portfolio invested in and speculating in tech stocks.

Well Rafe, millions of people in the UK have started investing even if they perhaps don’t know it, as a result of being auto-enrolled into their workplace pension scheme. But getting a new pension every time you change jobs is a bit of a faff. All of the old ones piling up in the drawer. What new measures is the Chancellor exploring?

Rafe Uddin
I mean, you’re right. Lots of young savers don’t really understand that their pensions are invested often for them in sort of default funds. And basically what the government wants to do is give workers the right to choose which retirement plan their employer uses to pay into contributions. So they’ve called it a pot for life, and it means a person’s contributions stay with them throughout their career, which is a hugely helpful thing. You know, it means that they don’t have to hold multiple pension pots, all paying different fees, possibly managed by various different companies . . . 

Claer Barrett
Invested in different things.

Rafe Uddin
Invested in different things, and often lost.

Claer Barrett
Yeah.

Rafe Uddin
The figures are something like £19bn are sort of lost in pension pots because people have forgotten about these pension pots.

Claer Barrett
And often it’s the simple fact of a young person in the rental market in a city like London moving house all the time. And unless you tell your pension provider though, hi there, I’ve moved address again. I mean, who really keeps up with that? That’s what they mean by lost. You know, a letter has gone out and it’s been returned to sender. But yeah, billions and billions of pounds. Any further thoughts about pensions? Katie?

Katie Martin
One of the other potentially significant things that Jeremy Hunt is looking at is he wants to consolidate massive pension schemes that are out there. He’s looking at ways to unlock these billions of pounds that are in pension schemes around the country and make them work harder in the equity markets, in stocks and shares. So currently, a lot of particularly defined benefit, sort of old school pension schemes are absolutely dominated by bonds. You know, almost all of their holdings are in the bond market. And the amount of pension money that’s been flowing into stocks and shares over the past couple of decades has just absolutely flatlined. And there are lots of measures under way to try and boost the London Stock Exchange and encourage more companies to list there. And, you know, looking at tinkering with listing rules, making it more attractive to companies, some people have described that to me as somewhat homeopathic. The thing that’s really going to fire up the stock market in the UK is unlocking these vast pools of pension money. Now, if pension schemes do get more leeway to put money to work in equity markets, there’s nothing to say they will necessarily put it to work in the UK in particular.

Claer Barrett
Well, yes.

Katie Martin
Nonetheless, this is an issue that the UK knows it’s facing and that Europe knows it’s facing.

Claer Barrett
Well, certainly there’s an interesting footnote in the Autumn Statement saying the Chancellor wishes that there would be as much focus on investment performance of pension funds in the future as there has been on the level of fees that they’re charging in the last few years, which is a noble sentiment. If you’re interested to hear more about the future fortunes of the UK equities market, don’t forget our recent Investment Masterclass with UK fund manager Nick Train is still available to listen to. Some interesting points that he made there that you could weigh up against today’s episode.

Now, finally, the Chancellor made an unexpected announcement about the government’s intention to sell part of its remaining stake in the bank, NatWest, to retail investors. Now, he announced this in his speech by saying it’s time to tell Sid to get investing again, prompting my younger colleagues in the newsroom to say, “Hey, who’s Sid?” Well, here from 1986 is the answer.

[BRITISH GAS TV ADVERTISEMENT PLAYING]

Claer Barrett
Katie, I don’t know if you remember these British Gas TV ads, but what’s their significance? What’s the chancellor essentially trying to do here?

Katie Martin
Come on, everyone remembers Sid. (laughter) Rafe is like looking totally blank. The rest of us totally know who Sid is. So it’s all about encouraging individual investors to get involved in stock markets and to buy shares of what at the time were kind of newly privatised companies. Now, one thing that really sticks in my mind is, you know, during Covid when in the US, everyone got their stimulus checks, right? So OK, you can’t go to work. Here are your stimulus checks . . . 

Claer Barrett
Furlough over here.

Katie Martin
Exactly. What did the Americans do with these pots of money? They played in the stock market, of course. Now, if you give a Brit £1,000 straight from the government, they’re either gonna put it in savings and something nice and, you know, something like a deposit fund somewhere. Or they’re gonna go to the pub. Whereas in the States you have this much bigger culture for equity investment and that kind of floods through the system and sort of helps companies to grow. And yes, it leads to some stupid excesses. But nonetheless, the kind of broad thrust is that individuals like making their own, you know, taking their own bets in stock markets. And that’s just culturally not what we do here. And so there is this kind of notion that we would like, you know, for average UK savers to be much more active in stock markets. And so this is the kind of, again, the sort of direction that Jeremy Hunt is keen to push us in.

Claer Barrett
Sam?

Sam Fleming
All I’ll say is this is a theme you hear across Europe. It’s not only a UK issue and it’s a real one, which is the sense that capital markets across Europe are not as vibrant as they are in the US. And the amount of corporate finance, corporate money that companies raise in order to expand their businesses, it largely tends to come from banks in Europe and much less in the capital markets. And the proportions are almost the inverse in the US. So it’s a major issue because it does lead ultimately, some would say, to a less dynamic economy. And so there are quite big stakes when we look at some of these themes we’re talking about in terms of the overall economic outlook.

Claer Barrett
Mm hmm. Well, certainly the prospect of buying shares in NatWest, as I pontificated in my FT column, which you can read in today’s shownotes for free, British Gas, when they were offering it to investors in the 1980s, it was a new thing. You couldn’t buy shares in it already. Whereas with NatWest, the proportion of the stock the government doesn’t own is being traded on the stock market. It’s gone down, as you’ve reported Rafe, around 25 per cent since the beginning of the year, partly to do with the Nigel Farage fandango and other things. So the question sort of remains, if you can already buy shares in NatWest, what can the chancellor do to make it more attractive to resell investors to buy a share of the government’s licence? In my mind, there’s only one thing you can do.

Rafe Uddin
Yeah, I mean, said fandango really sort of drove the share price a bit further down. And ultimately NatWest is trading at a huge discount, which means the government is going to lose about 10bn from selling its remaining stake. It doesn’t seem like a very exciting prospect for young savers. Ultimately, they really are drawn to those exciting new tech stocks. You know, the likes of Apple, Amazon, Tesla. And really that’s delivered through the fractional shares reform because that’s what people want to invest in. Not NatWest.

Claer Barrett
Hmm. Well, as we say, we don’t have a prospectus yet or a phone number to ring up and obtain it. But when we do, we’ll be sure to cover it on a future episode of the show. Well, all that remains for me to say is thank you to our panel for joining me today. Sam Fleming, the FT’s new economics editor. Rafe Uddin, our political reporter, and Katie Martin, our markets editor. I’m gonna give the final word to you, Katie. Because people have enjoyed listening to you on Money Clinic podcast, you’ve now got another podcast!

Katie Martin
Oh, yes. It’s all about the podcasts. Yes.

Claer Barrett
All the way! (laughter)

Katie Martin
Unhedged goes out twice a week. I’m on it once a week and we talk about whatever we like in markets and finance.

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Claer Barrett
Well, that’s it for this episode of Money Clinic with me, Claer Barrett, and we hope you like what you’ve heard. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues for the show. So if you’re interested in being part of a future episode and are looking for some expert money advice, then email us. Our address: money@ft.com. You could also take a peek at our website which is ft.com/money, grab a copy of the FT Weekend newspaper or follow me on Instagram, @Claerb.

Money Clinic was produced in London by Philippa Goodrich. Our editor is Manuela Saragosa. And you heard original tunes this week by Metaphor Music. Cheryl Brumley is the FT’s global head of audio. And finally, our usual disclaimer: the Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s all the small print for now. See you back here next week. Goodbye.