Autumn Statement digested: taxing times

This is an audio transcript of the Money Clinic podcast episode: ‘Autumn Statement digested — taxing times’

Claer Barrett
Hello there. If you like Money Clinic, then my colleague here at the FT has something we think you should try.

Malcolm Moore
I’m Malcolm Moore. I’m the editor of a new iPhone app from the Financial Times called FT Edit. FT Edit gives you eight of our best articles every weekday curated by our senior editors. It’s kind of a cheat way to get the best of FT journalism for your daily news fix. Your first month is free. After that, you can be the smartest person in the room for just 99p a month for the next six months. Read better. Spend less.

Claer Barrett
99p, now that is a bargain. Click on the link in today’s show notes to download the FT Edit app on your iPhone.

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If there’s one thing we can take away from the Autumn Statement, it is this: winter is coming for our personal finances. Brace the tax rises and spending cuts. The new chancellor, Jeremy Hunt, said he had no choice.

Jeremy Hunt
Yes, I am taking those decisions, and some of those decisions are very hard for me as chancellor. I’m a conservative chancellor who has put up taxes. I’ve had to delay those Dilnot reforms to social care, which is something I passionately did not want to do. But I’m doing it because we face an international economic crisis.

Claer Barrett
On today’s episode, we’re gonna unpick what the chancellor’s Autumn Statement last week means for your money. In a nutshell, prepare to pay more tax. That’s because inflation is the biggest challenge for the chancellor. Prices are rising at their highest rate for 41 years, pushing up the cost of food, fuel and bills as well as interest rates on debt. We’ll run you through what to expect, changes to cost of living help measures next April and why there was so little in Thursday’s statement for young people.

Welcome to Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor. Joining me today to make sense of the measures are two of the FT’s finest minds, our economics editor Chris Giles . . . 

Chris Giles
Hello.

Claer Barrett
And our political editor George Parker . . . 

George Parker
Hello.

Claer Barrett
 . . . who impressively has just cycled here. Now gents, fantastic to have you both on the show. Can we kick off with a very quick blast from each of you giving your key thoughts about the economic and the political fallout, starting with you, Chris?

Chris Giles
Well, I think the key economic constraint that faced the new chancellor Jeremy Hunt is that the forecasts he was working with were horrible. There’s no sugarcoating them at all. So the economy going into recession, that recession particularly focused on household finances. So real household disposable income down 7.1 per cent over the next two years. That’s the worst decline on record, taking household incomes back to about 2013 levels in real terms. Two decades of wage stagnation. House prices falling by 9 per cent. No growth at all in the economy between 2019 and 2024. I could go on, but you get that, you get (Claer laughs), you get the message that it was very, very little that was good for household finances there and for the economy, the nation’s finances.

Claer Barrett
Well, George, the political fallout over the weekend since the Autumn Statement has been pretty troubling for the Conservative party.

George Parker
It’s not exactly a solid electoral winning platform, is it, when you’ve got doubling unemployment, the highest taxes for 70 years, living standards collapsing, taxes at the highest level for 70 years. It’s almost like a dream election scenario for the opposition party, right?

Claer Barrett
Yeah.

George Parker
So you can understand why people are looking so miserable. And some people are on the phone to the headhunters discovering that being a Tory MP isn’t necessarily the best thing to have on your CV at the moment. So it’s . . . but having said that, the calculation of Jeremy Hunt, the chancellor, was that, as Chris just outlined, there was no alternative, especially given the disastrous “mini” Budget couple of months earlier. They felt they had to stabilise the markets. They had to reassure international investors that Britain was a place where it was safe, it was safe to lend money. And the other thing, I think from a personal finance point of view, is that they were absolutely determined to do whatever they needed to do with the Bank of England to bring interest rates down and because the most immediate danger, I think for many Conservative MPs, was the prospect of mortgage rates continuing to stay at a very high level because that is really bad news if you’re a Tory MP.

Claer Barrett
Well, let’s start by talking about tax. Here’s the chancellor.

Jeremy Hunt
I start with personal taxes. Asking more from those who have more means that the first difficult decision I take on tax is to reduce the threshold at which the 45p rate becomes payable from £150,000 to £125,140. Those earning £150,000 or more will pay just over £1,200 pounds more in tax every year.

Claer Barrett
So George, the chancellor himself admitted that he’d rather be cutting tax than raising tax. And we did get that symbolic dropping of the 45-pence rate threshold from 150 to 125,000, barely eight weeks after the Conservatives promised to abolish it. How has that gone down with the party rank and file?

George Parker
Well, the Tory right hates it, of course, because . . . and the public will have every right to be totally confused about this because two months ago we were told the only way to save the British economy was to cut taxes by £45bn, unfunded. And now we’re told the only way to save the British economy is to put taxes up. So it’s gone down badly with the Conservative right who would, as you say, much rather be cutting taxes, like Jeremy Hunt. But unfortunately, reality has bitten, you know, the country has been living beyond its means. You can’t have European levels of public services on American tax levels. The economy hasn’t been growing. I think Jeremy Hunt made the calculation that you might as well just get all the bad news on tax out of the way.

Claer Barrett
Can’t just sink it . . . Yeah.

George Parker
Just do it now. Frankly, the Tory right, they have their chance a couple of months ago, and they blew it. So it’s probably not the right time for them to be kicking up a huge amount of fuss. The other calculation Jeremy Hunt’s made, of course, is this is really their last chance. You know, this plan is their last chance. They’ve got to suck it up or else, you know, they’ll be a laughing stock if they start to try and chip away from this. It’s important to note, of course, that a lot of the really tough tax stuff, and Chris will probably go on to this in a minute, happens after the election. It’s tax, tax rises pencilled in after the election, principally through the idea of freezing allowances and thresholds right through to 2028. That’s a famous fiscal drag which will affect everyone, not just those people paying the higher rate, 45p rate of tax.

Claer Barrett
Hmm. Well, I mean, Chris, let’s go on to fiscal drag. The chancellor didn’t alter any other tax thresholds, but bizarrely, that in itself could raise tens of billions of pounds.

Chris Giles
It’s an extraordinarily effective way of raising money. Each time you get a pay rise, your average rate of income tax, your average rate of national insurance will rise because more of your money will be taxed either at all because you’ll be paying more of it in bands where you pay income tax, or you’ll be paying more of it at a higher rate of income tax or a higher rate of national insurance. And the same happens for your employer as well. So your employer will be paying more on the employer’s national insurance than before, and that will make them more reluctant to give you a pay rise in the first place because you cost more to them, and you can’t imagine that in the end, that isn’t a relevant thing that they think about when they’re trying to determine your pay. So all of this means in the end you get lower pay rises, and then on those lower pay rises, you’ll pay more tax.

Claer Barrett
And I mean, just to throw in an example for listeners, somebody who’s earning £50,000 now, that’s just on the cusp of the higher-rate tax threshold where you start to pay 40p instead of 20p in the pound. If you get that pay rise, more of your pay pushed above £50,000, taxed at 40 per cent, that could mean by 2028 you would be paying around £2,000 a year in extra tax compared to what you pay now. And of course, if you’re somebody who gets child benefit, £50,000 is the point at which that threshold is frozen. So you also lose money from that, too. Now, George, all of this is politically painful for the Tories. You know, £50,000 is a decent salary, but nevertheless big bites coming out of it at a time when the cost of living is shooting up.

George Parker
And the people you’re just describing there, they are traditional conservative voters. They’re the backbone of the Conservative party support, people on average medium, medium incomes. People that Theresa May used to call the “just about managing”.

Claer Barrett
Yeah.

George Parker
People that, I think, George Osborne used to call them “alarm clock Britain”, didn’t he?

Chris Giles
 . . . Or “strivers” is the latest thing.

George Parker
Strivers is what the Daily Mail calls them, but core Tory voters, in fact they, the demographic that determines how, which way general elections go. And I think that’s really significant that one of the things that Jeremy Hunt did in the Autumn Statement was to say, to make a big thing about the fact that compassion was a British value and that they were going to balance the books in a compassionate way. And that meant the state pension rising in line with inflation, benefits rising in line with inflation. So that means people at the bottom of the income scale — although some pensioners of course are not at the bottom of the income scale; leave that aside — were being protected against inflation. As Chris was just outlining, people further up the income scale, people in work are gonna be the big losers. And I spoke to one minister who said we’ve been compassionate, but we’ve not been fair. And by that the minister meant that there’s a whole slug of people, the ordinary voters, who are gonna be hammered by this.

Claer Barrett
Now, there was some good news in the Autumn Statement, the cost of living measures. We’re gonna hear a little clip from the chancellor now.

Jeremy Hunt
From April we’ll continue the energy price guarantee for a further 12 months at a higher level of £3,000 per year for the average household. With prices forecast to remain elevated throughout next year, this will mean an average of £500 support for every household in the country.

Claer Barrett
Now, the chancellor spelt out what help will be available from April when the current energy price guarantee expires and the relief is gonna be much more targeted at those lower earners that George was mentioning. Now, the bottom line is that households with average energy use face bills rising by around £100 a month from April as the support level changes. However, people on benefits, pensioners and people with disabilities will continue to get some additional cash support. What did you both make of this?

Chris Giles
So what we’re in now is a smoothing process where we’re beginning to pay more and more like the actual cost of our gas. But people who absolutely can’t, because their incomes aren’t high enough, are being protected. And that is the way, that’s where we’re going to. We don’t know exactly how this is gonna end up if wholesale gas prices come down another third, let’s say — perfectly possible. Then, there will be any difference from now. But if they stay where they are, then we’ll move, as you say, up to about £100-a-month additional payments for the average family. And that is going to be tough. I mean, it’s gonna come, and it’s coming on top of their wages almost certainly not going up in line with inflation. That’s a real income shock I talked about, first of all. And it also will come at a time when, if they are just by luck or by bad luck coming to the end of a mortgage fix, which is what most people are, have fixed rate mortgages, those mortgage rates will probably double or maybe even triple compared with when they last took out a mortgage. And this for lots and lots of families will suddenly mean that where they had some money left over at the end of the month, they could save it or they could have buy luxuries, those sorts of things will just become much more difficult.

George Parker
It’s worth bearing in mind that at the start of this year, the energy price cut for the average bill was £1,277, I think, wasn’t it? And we’re talking about average bills being capped at £3,000 for next April. That’s a huge increase. And the people who will be worse affected are exactly the people we’re just talking about a minute ago, the “just about managing” people. And that will create some animosity, I suspect, among some of those, those groups who feel they’re doing the right thing. They’re working hard, maybe doing two jobs to help support their family. And they’re looking at people further down the income scale, people on benefits, for example, who are getting 10 per cent increase in their benefits when their pay rise might be 2, 3, 4 per cent, who knows? And they get, and the people on benefits will be receiving additional help. And lots of people will say that’s exactly right, that they’ll be receiving additional help with their fuel bills. There’ll be a lot of people who’s already struggling to get by who won’t be getting that level of support, and that’s quite a toxic mood, I think, to have in the electorate, especially for a Conservative party, which traditionally is supposed to represent the interests of that particular group of people.

Chris Giles
I’ve talked a lot about people who have mortgages. 30 per cent of the population rent in the private sector. They cannot generally improve the energy efficiency of their home because that’s the landlord’s responsibility. They might live in a very draughty Victorian home, which requires a lot of energy to heat it, and so they might be spending much more than average the typical household on energy. It has nothing to do with them. It just happens to be where they live, and they’ll be people really at the shop and they won’t get any help from housing benefit because that doesn’t cover rent; it doesn’t cover energy bills. And so if you’re in that situation, there’s nothing you can really do about it. You just are a lot poorer. And, you know, these things are really gonna hit very hard over the winter and I think through next year as well.

George Parker
And of course, the landlord will be passing on the high mortgage costs on the property through higher rents.

Chris Giles
Quite possibly as well. Yeah.

Claer Barrett
Now there are also more shocks in store to household bills next year. From April, councils are able to raise the level of council tax in certain areas by as much as 5 per cent without having a referendum. And also, rents for people who are renting from social landlords are gonna go up by 7 per cent. Now, this was presented as good news by the chancellor because it could have gone up in line with inflation, which of course, is much higher.

Now, finally, I want to turn to what was missing from this statement. Frankly, there was very little in it for young people. Now, the high cost of renting and the equally eye-watering costs of childcare are two big issues that really impact broadcast listeners. But nothing specific to address these. What do you both think, starting with you, George?

George Parker
Well, there’s a Conservative MP called Charles Walker who made a bit of a name for himself by being highly critical of the Liz Truss administration and the shambles around it. And he wrote a column making similar points about this and the fact that the Conservative party were helping primarily older people through the triple lock on pensions. And I think someone in the House of Commons tea rooms said to him, well, Charles, they’re the only people who vote for us anymore (chuckles). It’s . . . and I think that’s sort of a, that is a leitmotif which runs through the way that the Conservative government looks at this. They will talk about the, the dignity of old age and wanting to repay the people who’ve sacrificed a lot to give us the standard of living we live and all the rest of it to justify the pensions. (Inaudible) It means there’s very little money left over for younger people and people struggling with childcare costs especially, so for younger families and everyone. Chris and I have children at university now, and, you know, you can see the outlook for them is really tough. And Chris, you did a calculation, I don’t know whether it’s changed now, but students with student loans coming out of the university, so earning about 28,000 I think, was facing a marginal tax rate of about 50 per cent at one point, weren’t they?

Chris Giles
They are. So that was with the national insurance increase, which of course, has been taken away. But we are a little bit lower now because we have reversed, the government has reversed some of the national insurance rises, but it’s very, very tough for young people now. Of course, you can make up a classic economist’s argument; it would be to say, well, young people do get old themselves. But, they, in generational terms, are finding it much tougher than we had it 30 years ago when I was my early twenties. And while, of course, we can’t predict the future, there’s nothing in the economic outlook that suggests that they will suddenly have a huge boon and with their wages over time, which previous generations didn’t have. The one thing I always say to younger people is, well, you do know that older people vote and younger people generally do not vote. And I think that is the key reason why they get slightly overlooked, and they are being overlooked.

Claer Barrett
So call to arms there, George, for young people. Get out and vote when the election comes. I mean, straws in the wind, but how could the Labour party potentially appeal to all of these disenfranchised younger voters?

George Parker
Well it’s the broader question the Labour party is going to have to face at the next election, which is if you are a centre-left party, what is your offer to the electorate when there’s no money left? My personal experience is, just talking to students and friends of my, my kids, there does seem to be a growing awareness of politics and the fact that voting does actually make a difference . . . 

Claer Barrett
Good.

George Parker
 . . . I think. So we’ll see. We’ll see what happens in the next election. I think, I think the participation of younger people has been going up. I could be wrong on this, but I think at the last election there was a bit of an uptick. So let’s hope that continues.

Claer Barrett
Now, of course, as well as paying more taxes for years to come, younger people also face the prospect of working for longer with news of a government state pension age review coming in early 2023. Now, you currently get your state pension at age 67. That’s the same for both men and women. But FT columnist Moira O’Neill has predicted anyone under 50 should expect their state pension start date to be pushed out to age 70 and in the case of the under-45, possibly age 75. Now, speculation, of course, from a well-formed personal finance commentator, but what do you both think about that?

Chris Giles
Well, I mean, the really interesting thing, and it’s that, again, we had, we sounded quite gloomy through this, and I’m going to sound even more gloomy . . .

Claer Barrett
Oh god (laughter).

Chris Giles
 . . . is that life expectancy in the UK has been falling. Part of that is Covid but part of that is not Covid, and we have had higher death rates than expected. For government finances, that’s actually sort of good news because we don’t have to pay pensions . . . 

George Parker
That’s some good news (laughs).

Chris Giles
 . . . Social, social care so long. But for life, it’s obviously bad news because we’re not gonna live as long. But it does mean that if you are going to raise the state pension age significantly, you cannot justify it now on the fact that we’re all living longer. It was always the previous justification for increases in the state pension age is that, you know, you have to make a longer contribution because you’re going to live longer, and you’re still gonna have 30 years of retirement after the state pension age, or 25 years or whatever. If that’s no longer the case, the government will have to make a much more difficult argument, which is, we just got no money so you’ve got to work longer. And that, I think, would go down particularly badly with people of all ages.

Claer Barrett
Well, people who are struggling with rising mortgage payments, as we’ve said, are also very worried. Now, George, many of them blame the government for that sudden hike in rates after the “mini” Budget. Politically, how much of a problem is this for the new prime minister and chancellor?

George Parker
The problem is interest rates are rising in any event. That means that mortgage rates are going up. And the political problem for the government is people will blame the government.

Claer Barrett
The die is set.

George Parker
Die is set. And this is, this is the problem that, because of what happened on September the 23rd with that “mini” Budget, the Conservative party has basically taken ownership of every interest rate rise.

Chris Giles
Bank of England is delighted.

George Parker
Right (chuckles). Right. Right.

Chris Giles
They can’t believe their luck.

George Parker
Rightly or wrongly, because, as Chris says, the Bank of England, people are putting up interest rates for obvious reasons. And, you know, it’s, it’s a fact of life that if you have a big economic screwup in flashing lights attached to the Conservative party, people will inevitably blame the politicians rather than faceless bankers in Threadneedle Street.

Claer Barrett
And just to end the show on an attempt to be uplifting, if you are somebody who is listening to the Money Clinic podcast, then you do have an advantage over many others in the sense that you are engaged with your personal finances and with all of the shocks that are coming down the line, tax rises in the next couple of years, people who are not aware of the impact this is gonna have on their finance, people who are unable to adapt, people who can’t forecast how much those rising bills are gonna affect them, to act in time, to get a better mortgage rate, lock it in for a longer period of time. I mean, Chris, if we’re not on it with our finances at the moment, and we’re really stuffed.

Chris Giles
Yeah. And things are changing rapidly so we can’t assume any longer that interest rates will be stuck at the floor as we could for the past decade. You can’t assume that your investments are going to do pretty well every year. Might be some better some years and others after the past year. And it’s really important to know what’s likely to happen. You got to expect real income falls, so that your incomes will not keep in pace with inflation if you’re working because the nation is just poorer. And so the worst thing you can do is not be on it because then thing, your finances might well get out of control. If you sweep it all under the carpet or stick your head in the sand, then, you know, at some point you might get a really nasty shock.

Claer Barrett
And do go through our back catalogue of episodes. We’ve got lots of tips on budgeting, on fixing your mortgage as rates change, on student loan repayments, and also how to ask for a pay rise and get one, which is our most listened to episode of the year. George, you’re nodding your head. Are you gonna go cap in hand to the managing editor later?

George Parker
Absolutely!

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Claer Barrett
Well, we can’t make the news any better for you, but I hope you’ll agree that George Parker, our political editor, and Chris Giles, or economics editor, have both made it much clearer and easier for us to understand. Thanks both for joining me in the studio today.

George Parker
Pleasure.

Chris Giles
Yes, pleasure.

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Claer Barrett
That’s it for Money Clinic this week, and we hope you like what you’ve heard. If you did, spread the word and leave us a review. And if you’d like to chat with me on a future episode of the show, then get in touch. You can email me. Our address is money@ft.com or DM me on Twitter, while it lasts, Instagram or TikTok. I’m @ClaerB. Money Clinic was produced by Persis Love and Philippa Goodrich. Our executive producer is Manuela Saragosa. Our sound engineer is Breen Turner. And the original music is by Metaphor Music. And finally, 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 the small print over and done with. See you back here soon. Goodbye.