The chancellor’s autumn statement, delivered to the House of Commons on 17 November, set out the economic strategy for the UK. The current cost of living crisis, however, significantly reduces the chancellor’s options moving forward.
In this article we look at the measures that have been announced, the economic forecast from the Office for Budget Responsibility (OBR) and assess how the autumn statement could impact rural businesses and CLA members.
The future of the UK economy
When the mini budget was delivered on 23 September, it was not assessed by the OBR. This proved to be a major error, underlining that there was no independent assessment as to the accuracy of the fiscal measures being put forward. We all know how it went: the financial markets went into meltdown and the Bank of England had to intervene to steady markets.
However, the autumn statement has been assessed by the OBR. It forecasts that inflation should peak at 11% by the end of the year and then begin to fall over the next four years. It is expected that it will return to its benchmark rate of 2% by 2027/28.
In terms of growth, the projected growth of 1.8% for 2023 will be reversed to -1.4%. When taking into account the squeeze on real incomes, rise in interest rates, and fall in house prices, all weighing on consumption and investment, it means that the economy is in recession. It is estimated that this recession will last for four to five quarters to the end of 2023.
But rising inflation and rising prices have already eroded real wages and living standards are forecast to fall by 7% over the next two financial years to 2023-24. According to the OBR, this will wipe out the previous eight years’ of growth. Unemployment is likely to rise by 505,000 from 3.5% to peak at 4.9% in the third quarter of 2024.
The OBR forecast is bleak. It suggests that the UK economy is now in recession and that this will last for well over a year. As importantly, there is a clear statement that if the economy is to recover over the forecast period, demand has to be reduced through a combination of tighter fiscal rules and higher interest rates. However, inflation has already gone over the forecasted peak of 11% (at 11.1% for October) so there is a real possibility that inflation could be higher and could be at the higher rate for a longer period of time.
Energy prices and relief schemes
The government introduced two schemes to help alleviate pressure on households and businesses as a result of substantial increases in the wholesale gas price and the price of oil. The Energy Price Guarantee scheme relates to residential households and the Energy Bill Relief Scheme for businesses. The length of the Price Guarantee scheme has now been reduced from the original two years to six months and then extended by a further 12 months for certain vulnerable groups. The Energy Bill Relief Scheme remains a six month scheme, ending in April 2023. Only selected vulnerable sectors will then be able to rely on the price cap from April 2023.
It needs to be remembered that under the Energy Bill Relief Scheme, the price cap only applies to the wholesale price and does not cover distribution costs including standing charges. We have seen that these can be extremely high as well as being very variable. It is important for members to take into account these charges and see if they can get quotes for new energy contracts with lower standing charges and distribution costs.
There is a real concern that with the schemes coming to an end at the end of March, businesses and consumers will face a cliff edge. As we have seen, all rural economic sectors have been negatively impacted but some sectors, such as tourism and hospitality, have been subjected to serious cost pressures which have questioned the viability of many.
The CLA will be working with others to ensure that the government is made fully aware of the implications for business if they are faced with a cliff edge scenario. There will be businesses that will not be able to continue with direct government intervention, simply because their costs have outstripped actual returns.
The chancellor announced that the hourly minimum wage will increase from 1 April 2023 as follows:
- 16-17 year olds and apprentices: £5.28/h;
- 18-20: £7.49/h;
- 21-22: £10.18
- 23 and over: £10.42/h.
These new minimum rates mean an increase of around 10%.
For those in the agriculture sector, the impact is likely to be minimal given that the majority of businesses will already be paying above the minimum wage. However, it could set a dangerous precedent for wage increases in general as well as additional costs to members. For the overall economy, this wage price pressure could lead to wage spirals which, in turn, adds further inflationary pressure on the rural economy.
If we drill down into the tourism and hospitality sectors, the minimum wage increase will mean additional costs. This is at a time that there is increasing job competition as a result of labour shortages. As with the rise in energy costs and raw materials, the increase in labour costs will severely impede businesses to trade efficiently. It seems inevitable that there will be business casualties and there is already evidence that some hospitality businesses will cease trading during the winter.
There was a growing concern that, given the £55bn financial black hole in the economy as announced at the autumn statement, infrastructure projects would take the brunt of any savings. This would have adversely affected the rollout of Project Gigabit.
However, the good news is that the chancellor said that the present budget allocations for infrastructure projects will remain at the same levels. For Project Gigabit and the rollout of full fibre digital connectivity, this means retaining a budget of some £5bn.
Nevertheless, only £1.2bn has actually been earmarked so far for public intervention. If digital infrastructure is to mean anything, there needs to be a clear framework as to how the remain £3.8bn will be spent as it is this money that will ensure that we will see universal digital coverage.
Investment zones were first mooted by the former chancellor, Kwasi Kwarteng, during the mini budget on 23 September. These were intended to provide incentives to new business growth in particular parts of the country where businesses would benefit from more flexible planning rules and more incentives through tax breaks and business rates holidays.
Although the principle of investment zones may have sounded positive, there was a real possibility that there would be, what’s called, 'economic displacement', where resources are sucked out of one area and flow to another. Assessing the proposed investment zones, there was a real possibility that rural resources would begin to flow out of the rural economy. Not only would this have exacerbated the rural-urban economic divide and potentially reduced rural economic growth, investment zones could have increased pressure on businesses to restructure when that may not have been in their best interests.
However, the autumn statement makes it clear that the original ambitions have been somewhat toned down. Now, investment zones will be focused on achieving innovation through more targeted R&D at university level. Indeed, it may be the case that this different direction could benefit the rural economy in stimulating innovation and through that, help increase productivity.
What is interesting to note is that the chancellor made no mention of fuel duties. According to the OBR, this is projected to increase by 23% in April 2023, meaning an extra 12p/litre on diesel. According to the government, any freeze on fuel duties will be made at the spring budget in March.
If it is decided that there will be no freeze, the impacts on rural areas could be severe. Given the challenges of location and extended supply chains, transport and transport logistics are vital. If the costs of fuel increases as a result of higher excise duties, businesses as well as rural communities will feel the effect.
Will the autumn statement work as intended?
There have been a number of economic forecasts for the UK recently: the Bank of England at the time of the last increase in interest rates, the Office for Budget Responsibility at the time of the autumn statement, and the most recent, today’s assessment from the Organisation for Economic Cooperation and Development (OECD).
Although there is a difference in the rate of inflation being forecast and differences in view as to the length of the crisis, there is a clear consensus as to the root causes and the actual impacts on the economy.
The CLA projection at the time of the Covid-19 pandemic forecast that the economy would not stabilize to pre-Covid levels until at least four years after the end of coronavirus. This holds true but the overheating of global economies as a result of surging demand led to very volatile energy markets which, together with geopolitical events, has culminated in the cost of living crisis. This means we have adjusted our original forecasts and extended the period of recovery by a further two years.
The immediate objective of the autumn statement is to try and stabilise economic activity. It cannot be viewed as a budget for growth given the forecasts from the Bank of England, the OBR and the OECD. It is laying a platform where the economy can be rebuilt on a more robust footing and where the financial markets welcome that resilience rather than take flight.