If you believe that there is a £55 billion ‘black hole’ in the public finances, and if you believe this has to be filled with tax increases and spending cuts in order to reassure the markets, then Jeremy Hunt’s Autumn Statement was a reasonably fair way to go about it. But there are some mighty big ‘if’s in there.
Let’s begin with the positives. First, most of the tax increases and spending cuts do not bite until the later years of the forecast horizon. Spending is actually being increased this year and next, meaning that fiscal policy is providing a little more support to the economy now when it needs it the most.
What’s more, if the economy does better than expected, or other events intervene (including the next General Election), there is still time for the tougher measures to be diluted.
Second, there is more help for the most vulnerable households. Working-age benefits and the state pension will both be raised in line with inflation, and there will be another round of cost-of-living support payments. (The ‘triple lock’ on the state pension is unsustainable in the long run, but now was not the time to unpick it.) There is a chunky increase coming in the national minimum wage too.
Third, the Energy Price Guarantee will also be retained, albeit with the cap on the average household bill rising from £2,500 to £3,000. This is still lower than the level indicated by the latest market prices and therefore increases the chances that headline inflation has already peaked.
But back to those ‘ifs’. Congratulations to anyone who had £55 billion in the sweepstake for the size of the fiscal hole that needs to be filled in five years time, which is little more than guesswork.
This number is based on long-term forecasts for growth and inflation, as well as market expectations for interest rates and commodity prices, which will almost certainly be wrong. Indeed, the further falls in market interest rates since the OBR finalised its numbers may already have reduced the size of the hole by as much as £10 billion.
The amount of tightening required also depends on the Chancellor’s own choice of fiscal rules, and on the amount of ‘headroom’ that the Treasury wants to create for itself. Here, Jeremy Hunt has at least kept one aspect of ‘Trussonomics’, extending the timeframe for debt falling as a share of GDP by two years, to 2027-28. But the OBR reckons he will meet that target with nearly £10 billion (to be precise, £9.2 billion) to spare.
(So, factor in the latest fall in interest rates and do away with the ‘fiscal headroom’, and that’s £20 billion of the £55 billion sorted at a stroke!)
Nor is it obvious that the only way to repair the public finances is some combination of tax increases and spending cuts. The risk remains that the pendulum has swing too far from the pro-growth policies of Truss and Kwarteng back to self-defeating austerity.
One example is Jeremy Hunt’s decision to lower the threshold at which higher earners pay the upper 45p rate of income tax, which goes far beyond just reinstating a tax abolished in Kwarteng’s mini-Budget. This won’t raise much more for the Treasury, but it will send a negative signal to higher earners and the multinational companies that often employ them.
Businesses have little to cheer, either. Remember that the main rate of corporation tax is already going up to 25% in April, even though Jeremy Hunt called for it to be cut to 15% when campaigning himself for the Tory leadership.
Delayed tax increases are also still tax increases. Even if most people will not be paying a lot more tax now, almost everyone (especially in the ‘squeezed middle’) knows that their tax bills are likely to increase relentlessly for many years to come. The early media headlines are all about the increase in the tax burden and this is bound to dampen consumer confidence.
Extending a ‘temporary windfall tax’ on the profits of North Sea oil and gas companies all the way to 2028, long after the energy crisis will have passed, is not a good look either.
It certainly makes little sense to claim that Hunt had to be tough in order to repair the damage that Kwarteng’s mini-Budget had done to the UK’s credibility.
For a start, any negative impact from the mini-Budget had already unwound. It is hard to disentangle UK-specific moves from global trends. But over the past month the yields on UK government bond have fallen further than those in other markets, and sterling has rebounded strongly.
It might still be argued that this was in anticipation of the return of some form of austerity. However, it was surely sufficient to cancel the measures in the mini-Budget that had most unsettled the markets, including the abolition of the 45p rate of income tax, and to scale back the universal support under the Energy Price Guarantee.
In reality, few in the City were calling for large tax increases and spending cuts at a time when the UK and global economies are sliding into recession. Kwarteng’s mini-Budget did not go down badly with the markets because they wanted austerity instead.
In short, the measures in the Autumn Statement may not harm the economy as much as some had feared. But the Chancellor has still taken more risks than he needed to, in an attempt to reassure markets that were no longer that worried anyway.
This piece is based on articles published in the Telegraph and the i on 17th November 2022