The Truss team railed against the pessimistic forecasts of the Office for Budget Responsibility (OBR). They tried a tax-cutting statement without OBR forecasts and without setting out their alternative view of spending, revenue, and borrowing. I thought that unwise at the time.
The Sunak team were strongly critical and argued for higher taxes and less spending. The new Prime Minister and Chancellor are now pondering very difficult options for tax rises and spending cuts as the likely depressing OBR forecasts come to haunt them. Pass an austerity budget and they will end up with more borrowing and less popularity.
I have long argued for a different control system for guiding our economic progress, where a tougher rule on inflation complements a growth target. A limit on interest payments on debt which is already exists would complete the framework for prudence. Unfortunately, no post-Brexit Chancellor wanted in better times to make a change from following the EU system based on state debt as a percentage of GDP.
The current irony is the EU have seen how impossible steering with such targets is in today’s conditions and have suspended them. Meanwhile, the UK must set a budget which demonstrates debt falling as a percentage of GDP by the end of the forecast period, if not sooner.
This approach has various problems. No-one can know what the deficit will be in three years’ time, so the controlling number is a guess. If the number shows a possible large deficit, it forces tax rises and spending cuts. These may result in a recession. A recession would increase our actual deficits since they are very sensitive to growth rates.
The marginal extra pound people and companies earn as the economy expands is highly taxed, bringing in more revenue. Growth cuts the numbers out of work and increases taxable activity. Recession removes the highly taxed marginal pounds and plunges more people onto benefits.
The Truss team were right to go for growth, and to take some action to offset the pending downturn. You need to do so whilst eliminating undesirable spending, aiming to limit the deficit. The new team must grasp that, going forward, they do not have a lower deficit option. They either allow the deficit to become a bit higher to offset some of the recessionary forces, or they reinforce the recession with tax rises and end up with an even bigger deficit.
Raising corporation tax as much of the world slows down or slumps will doubtless mean much less inward investment and less new business, depressing our revenues. We will have to watch Ireland attracting more of the investment that is available thanks to their much lower tax rate.
The best approach both for our economic prospects and to unite the Conservative party would be to launch a Sunak growth plan, including limited tax cuts to foster more enterprise, investment and revenue, sensible spending levels, and an appraisal of forecasts of the future deficits.
Scenario forecasts rather than spot forecasts would be so much more informative given the range of variables. Gas and electricity prices will have a big impact on spending and inflation going forward. Interest rates will have a growing impact on the cost of servicing our debt so let’s see how outcomes vary with different levels of these and other crucial influences.
The Chancellor should reinstate the roll back of the aggressive IR35 changes of recent years. We need all the self-employed and start-up businesses we can get and the onerous rules deter or impede this progress. He should work with the Business Secretary to accelerate permissions for North Sea oil and gas investment. We need to cut carbon dioxide output by substituting our own piped gas for the imported Liquid Natural Gas, which will also greatly boost tax revenues. We need to extract and sell more of our own oil for the same reasons.
The Chancellor and Business Secretary also need to put plenty of tax incentives into the new Enterprise Zones, and to ease business rates generally. The carbon tax should be suspended whilst energy prices are so high, as it is forcing the closure of high energy industries. More imports, fewer jobs, and less tax revenue will result from failing to tackle very dear industrial energy in the UK.
The government must reduce spending. They should tell the Bank of England not to sell bonds at a big loss, saving £11bn of payments to the Bank from the Treasury between now and next March. The Bank’s bond portfolio has always required government underwriting and there is no need to sell these bonds at current prices.
The Government should also amend the generous energy support package. They must limit the amount of energy any household can buy at the subsidised price to a reasonable amount. If rich people want to heat their swimming pools and outdoor hot tubs then they should pay full price for the extra power required.
The changes to social care that have not yet been fully thought through and costed could be postponed. The free smart meters programme, which costs over £1bn a year, could be suspended. Abandoning the later phases of HS2, where construction contracts are not yet signed, could save a potential £100bn in future years. The collapse of commuting demand for rail travel has greatly changed the capacity case for this investment.
The best cuts of all can come from intensifying work to help more people on benefits into the many jobs currently available. We need more mentoring, training, encouragement, and a clear understanding that benefits are temporary support between employment. The Government also must slim down the numbers of quangos, service by service, with the aim of having civil servants deliver more with less.
November 17th is a big day for the Sunak government, and the country. It must confirm sufficient help to people so all can afford their winter energy bills. It must demonstrate determination to reduce inflation, as the current higher interest rates should do. The future path of deficits and borrowing must look better as public spending control and a resumption of growth brings revenues closer to expenses.
The Government needs to remember you cannot tax your way out of recession, but you can tax your way into one. There is no way forward for the next year without borrowing more, but there are choices that can reduce the downturn which austerity would make worse. Growing future revenues by producing more of our own energy, growing more of our own food, and making more of our own industrial products is crucial to deficit reduction. Spending selectively for more growth is essential.
This financial statement will define politics up the next election. Going for growth in a responsible way is what is needed.