A missing spoonful of sugar…


While reading through the Autumn Statement changes this week I was reminded of one of the most famous songs from the 1964 Disney movie Mary Poppins: A Spoonful of Sugar (Makes the Medicine go down).

Sadly, in this week’s Statement new Chancellor Jeremy Hunt forgot the sugar or indeed any kind of hope for tomorrow. It was an austere Budget for a tough time, very much a bitter pill to swallow for everyone.

Despite this, overall I am encouraged but why?

This was at least a plan based on the Office for Budget Responsibility’s forecasts – which predecessor Kwasi Kwarteng dispensed with to his cost.

It was grounded in the grim reality of our current situation. There was little flannel just a recap of the mess we are in and a way to get out of it.

Inflation is high and almost out of control, we are in recession and unemployment is forecast to rise next year while government borrowing needs to be brought under control to balance the books and avoid a loss of confidence in the UK economy. The pandemic and the energy crisis have blown the UK economy off course and massively increased government borrowing.

Despite this, I still wish Mr Hunt had offered some sugar to sweeten the pill but perhaps that’s something for his actual Budget, potentially in March.

One thing that was disappointing was the decision to extend the freeze on income tax thresholds until 2028. Offering people six years of increasing tax burdens is no way to win an election (due no later than January 2025 by the way). I suspect Mr Hunt may begin turning his attention to more populist economic measures soon if wants to remain Chancellor for longer than most of his recent predecessors.

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On the positive side, the decision to honour the State Pension Triple Lock was probably the most encouraging move he made and one which should be applauded, albeit it was a manifesto pledge. I suspect the temptation to water this down was high so expect efforts to begin to unravel the lock in some way next year.

If there was one prize on offer in the Budget it was the promise that the Great Satan of inflation would be brought back under control once more. Inflation is the enemy of both savings and investment returns. In real terms everyone is poorer when inflation is this high.

I have no doubt that planners have had to factor in questions about inflation when updating clients recently. Few portfolios will have been able to beat the current rate of inflation and while pensioners will be protected to some degree by inflation-linked increases many will be worried about what the future holds.

The hope is that inflation will begin to subside by the middle of next year and Bank of England Governor has already talked about his hope that inflation will be back on course, at 2% or less, in the forseeable future.

So the medicine is bitter, there is little sugar yet but there is a reluctant acceptance that inflation must be tackled if everyone is to benefit long term. That ‘reward’ of lower inflation is perhaps the most promising factor in the Autumn Statement but there will be pain in the meantime.

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However, Mr Hunt must remember that the promise of better times needs more detail and he must focus his efforts on rewarding savers and investors for their hard work. Simply imposing higher tax burdens on higher earners for the foreseeable future is not a long term solution to the country’s challenges. It risks disincentivising people.

Those who pay more tax than most need just as much encouragement as anyone else if they are not to shift much of their wealth overseas or get involved in arcane tax avoidance measures. Everyone will accept some bad medicine but this must be fairly applied and the medicine must not risk killing the patient. A little bit of sugar really will help the medicine go down much better in future.

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