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Chancellor Hunt reveals government spending plans in long awaited Autumn Statement – reaction from investment experts

14/10/2022. London, United Kingdom. Prime Liz Truss appoints Jeremy Hunt as Chancellor. Official portrait of the Chancellor of the Exchequer Jeremy Hunt. Picture by Andrew Parsons / No 10 Downing Street

Today’s statement to the House of Commons from Chancellor Jeremy Hunt has been much talked about and investment experts are sharing their reactions with Wealth DFM now that we know the detail.

Following the disaster of the ‘fiscal event’ delivered by the former Chancellor Kwarteng in September, it’s clear that it’s the battle against inflation and trying to restore the UK’s somewhat battered economic credibility which are highest on Hunt and Sunak’s agenda.

Today, Hunt has been setting out some of the detail of the government’s plans to tackle the so-called ‘black hole’ in the government’s coffers – to get national debt falling within 5 years – by finding around £54bn from a combination of tax hikes (especially stealth taxes) and government spending cuts in a massive fiscal tightening exercise.

But what’s the verdict from investment experts?

Neil Birrell, Chief Investment Officer, Premier Miton Investors: “The Chancellor delivered an Autumn Statement that was in line with broad high level expectations, although there were a few surprises in the make-up of the measures. The tax take is rising, but so is spending, although that won’t be much in real terms. The OBR is not exactly forecasting an exciting outlook; after a fall in GDP next year, the following three years will show modest growth, and inflation is going to be a real problem for some time. “The targeted support for the consumer, increase in the national living wage, inflation linked benefit increases, and good news on pensions will be taken well, but the news on energy bills won’t be. “The consumer will remain under distinct pressure, with Bank of England monetary policy being key in not tipping the economy into deeper trouble. The Chancellor is clearly looking to the long-term in trying to fix public finances, but the short-term is what it is all about, and that remains problematic.”

Tom Gilby, equity research analyst at Quilter Cheviot comments:   “Low carbon electricity generators are now firmly in the crosshairs for the government with the introduction of a 45% windfall tax. This recognises that they have so far gone under the radar in being beneficiaries of rising energy prices along with a stable cost base. “Some energy generators, such as SSE, have been more vocal than their oil and gas counterparts in protesting against a windfall tax and the impact it could have on investment, but this was always likely to fall on deaf ears for as long as extraordinary profits were made in this cost of living crisis. The headline rate of 45% appears harsher than the one on the oil and gas producers at first glance and they could feel hard done by given the level of investment in clean energy and the lack of share buybacks. However, there is a nuance here in that it is on profits over a certain level as it tries to keep some semblance of an innovative industry. It remains to be seen how much of this investment will ultimately be threatened, but with this windfall tax landing at the same time as interest rates and inflation raising the cost of funding new projects, it could be more detrimental than when first designed. “The government does need to be careful here that it does not choke off any of the transition to clean energy. Hunt spoke of the importance of energy independence via clean energy sources and thus the impact of this windfall tax will need to be monitored closely, otherwise the transition to net zero could be put in doubt.”

Rob Morgan, Chief Investment Analyst at Charles Stanley, comments:The tax-free allowance for share dividends is to be cut from next April to £1,000, and subsequently £500. The dividend allowance, which is on top of the income tax personal allowance, was reduced from £5,000 to £2,000 in 2017. Lowering it further means more people end up paying tax on their dividends, notably those reliant on them for regular income and self-employed individuals to paying themselves via their own company.”

Commenting on the Autumn Statement, head of multi asset at Royal London, Trevor Greetham said: “Are we in danger of learning the wrong lesson from the mini budget crisis? September’s gilt market meltdown was caused by a policy tug-of-war, with proposed tax cuts working against the Bank of England as they raised rates to counter double-digit inflation. Gilt yields have since dropped sharply, but the prospect of significantly tighter fiscal policy, as high interest rates take effect, risks a long recession, with knock on damage to real consumer incomes, property markets and domestically-focused stocks. “The best way to deal with a high debt burden is to grow your way out of it. Public investment should be protected and the government should explore ways to improve the UK’s woeful export performance.”    

Jamie Maddock, equity research analyst at Quilter Cheviot comments: 

“One of the biggest questions we had when the windfall tax was placed upon oil and gas producers back in May was for how long it would remain in place. Jeremy Hunt seems clear that 2028 will be the end date, taking into account the cyclical nature of energy firms, so it is now very much a higher tax for longer. Even since May the political mood has shifted further, and many of the energy giants have recognised this, with Shell being the most prominent company calling for further windfall taxes to help ease the burden on the consumer. That 2028 date will remain very fluid as a result, so certainty cannot be guaranteed.

 

“As a result, the government has spotted an opportunity to help plug its black hole in the public finances. It is perhaps seeing elevated oil and gas prices for some time beyond when inflation is expected to fall back to more normal levels. It is worth noting that the oil market is undersupplied and with recent tightening by OPEC, high prices are likely to be sustained for as long as the war in Ukraine continues and demand remains elevated.

 

“The biggest argument against the windfall tax has always been how it will kill investment at a time when we need the energy companies ploughing money into the transition to net zero and to alleviate overseas fossil fuel dependence to aid self-sufficiency. We are yet to see a meaningful drop off from the likes of Shell and BP in investment, though it is likely to be the smaller players whose spending could be threatened by this further government intervention. These smaller firms play as equally an important role as the giants in reducing the UK’s dependence on overseas oil and gas.

 

“However, the government continues to dangle the carrot of tax breaks to the oil and gas producers in order to protect this investment. This is politically controversial given there is no stipulation on what type of investment is permitted. The government has chosen not to tighten the rules around this, acknowledging how much it still needs these businesses. As a result, the government will continue with this blunt instrument that pleases few and remains murky on its effectiveness.”

 

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