Jeremy Hunt’s autumn statement is a poisoned chalice for whoever wins the next election
UK Chancellor Jeremy Hunt has produced a highly political autumn statement that throws forward major cuts in public spending to after the next general election. The accompanying economic forecast by the government’s Office for Budget Responsibility (OBR) confirms that the country is facing a recession, with unemployment rising, inflation still high, and the average person’s standard of living dropping by 7% – wiping out almost all the gains of last decade.
The chancellor aims to ease the pain by increasing benefits and pensions in line with inflation. He is also raising spending on health, social care and education, while maintaining the spending levels already planned for all departments until 2024-25 in cash terms.
But this still means public spending will fall behind once inflation is factored in, particularly in departments not seeing increases today, with little room for any increases in public sector wages. And as we shall see, the plan is to tighten the screws after 2025 – forcing Labour to decide whether to back this plan at the next election.
Where debt is heading
Hunt has made his task of balancing the budget easier by changing the government’s own self-appointed fiscal rules. The yearly budget deficit has to drop below 3% of GDP by the end of the forecast period, when previously the target was no deficit on day to day (current) spending. And the forecast period over which underlying government debt (meaning public debt excluding Bank of England debt) as a percentage of GDP has to start falling has also been extended from three years to five years.
Even then, the OBR forecasts that Hunt will only barely meet that debt/GDP target by 2027-28, despite nearly £60 billion of spending cuts and tax increases along the way. Underlying debt is expected to hit 89.9% of GDP in 2022-23 and peak at 97.6% in 2026-27 before falling back to 97.3% the following year.
This still depends on a relatively optimistic OBR forecast that economic growth will reach 2.7% in 2026. Notwithstanding the higher tax revenues that this would garner, the OBR reckons government debt will be £2.8 trillion by 2026-27 – over £500 billion higher than today. The cost of servicing the debt is forecast to be virtually the same as the whole education budget.
Servicing this debt and reducing the deficit will come at a huge cost. Given the unpopularity of public spending cuts, the government has been forced to raise taxes by almost as much as it is limiting spending. It has chosen to do so in the least visible way possible, to limit the political impact while sticking to its manifesto commitment not to raise the basic rate of income tax or VAT, and now also national insurance.
The government’s biggest increase in personal taxation is by continuing its policy of not raising in line with inflation the thresholds at which people start to pay income tax and national insurance, or for paying the higher rates. This “fiscal drag” means more people are dragged into paying more tax over time, yielding substantial additional tax revenue during a period of high inflation. But these taxes go up more slowly and are less visible to the public.
It’s worth noting the government’s plan to get councils to raise council tax to help fund social care. Due to the failure to uprate the council tax bands for over 30 years to keep up with rising house prices, this will fall more heavily on poorer areas of the country.
More generally, the personal tax measures will not hit the poorest as hard, but very little has been done to tax wealth, which is far more unequally distributed than income. The main increases to taxes on wealth include lowering the thresholds for when dividend and capital gains taxes begin to be charged (yielding £1.3 billion together) and lowering the 45% income tax threshold from £150,000 to £125,000 (yielding £855 million).
On the other hand, business taxes are set to rise. The increase in corporation tax, already pencilled in for April 2023 during Rishi Sunak’s chancellorship before being cancelled by Liz Truss, will yield £17 billion per year. The government is also increasing the windfall tax on energy companies and introducing it for electricity generators, yielding £10 billion in its first year of operation, but easing assuming energy prices fall back as expected.
By freezing the thresholds for employers’ national insurance, the government will gain an additional £5.8 billion in revenue. Though there are plans for rate relief for small businesses, the overall effect may be to further depress business investment vital for future growth.
A key reason that public spending has not been cut more in the next few years is that the estimated cost of the temporary package to help people with power bills has fallen sharply. Due to reduced support after April 2023 and a fall in forecast prices for wholesale energy, it is now to cost £60 billion rather than over £100 billion over the next two years.
Other departments are meanwhile bearing the strain from previous cuts. The cut in overseas aid, for example, is paying for increasing health spending. And much of the extra spending on social care will be funded by councils increasing council tax by 5%.
Typically, in times of austerity governments tend to cut capital spending rather than current spending, whose effects are more visible to the public. Jeremy Hunt’s pledge to preserve public spending on infrastructure in the short term means backing high-profile projects like HS2 and the Sizewell C nuclear power plant.
But in the years after 2024-25, it’s a different story. Capital spending of £96 billion by 2027-28 represents a £14 billion reduction on the previous plan. Although the equivalent reduction in current spending will be £22 billion, current spending is nearly five times greater overall so it’s proportionally a much bigger hit to capital spending. Together with slower growth in support for R&D in later years, it’s not encouraging in terms of promoting a growth agenda.
The politics of the budget
The autumn statement is cleverly crafted both to reflect the public mood and set traps for Labour. Judging by the calm response from the financial markets, Hunt seems to have gambled correctly that they will accept his claim to be fiscally responsible even though most of the spending cuts and tax rises will only come after the next general election, most likely in 2024. It helps that the markets know that Labour is broadly in favour of similar fiscal rules and accepts the OBR framework.
Hunt has also probably read the public mood correctly that after a decade of austerity and fears about a cost-of-living crisis, they would not support cuts being predominantly in public services.
Yet it is by no means clear that his measures will either help the UK out of recession or prevent a decline in living standards. Nor is it likely to boost investment in skills and infrastructure which would increase the UK’s productivity. With the poorly performing economy, the question of which party the electorate will see as more economically competent is just beginning.