A boxer having the worst of a bout may wrap his arms around his opponent. He won’t then be hit. But he won’t able to hit back himself, either. The technical term is “clinching” (or “holding” or “hugging”). Yesterday saw Jeremy Hunt deliver a clinch of a statement.
The accumulated inheritance of living beyond our means, plus the financial crash, plus Covid, plus the Ukraine war, plus Boris Johnson’s spending and Rishi Sunak’s taxes overloading the car, plus Liz Truss and Kwasi Kwarteng then crashing it has left Conservative-led government – now halfway through its fourth term – depleted.
The new Chancellor is far from exhausted, having had a three-year break, but his room for manoeuvre yesterday was minimal. All he could do was ensure that he wasn’t knocked out by his Autumn Statement, as Kwasi Kwarteng was by his mini-Budget only a few weeks ago.
As I write, Hunt sways on his feet, his arms holding the markets tight. The pound is down a bit. Gilt yields are up a bit. Interest rate expectations are higher than they were before the Statement, but lower than they were before the mini-Budget. Let’s see what happens next.
The markets could conclude that the Chancellor has overdone the fiscal tightening – and, to be sure, the Statement at first glance is Götterdämmerung. The tax burden is set to rise to its highest since 1948. Spending growth will be pared back from 3.7 per cent a year to one per cent a year. GDP will fall in 2023.
Household incomes are expected to fall by seven per cent over the next two years. But this squeeze won’t balance the budget. Hunt has torn up Sunak’s fiscal rules. The Conservative Manifesto of 2019 promised that “debt will be lower at the end of the Parliament”.
But the Chancellor told the Commons today that “underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period” and that “public sector borrowing, over the same period, must be below three per cent of GDP”. So much not only for a balanced budget but for reliable rules, too.
Probe the statement more carefully, however, and it presents a less apocalyptic picture. In crude terms, the tax rises are coming now and the spending cuts later. Hunt has pushed the latter back until after the expected date of the next election. His judgement seems to be that voters wouldn’t wear the cuts now but will wear the rises.
Especially if these are concentrated on better-off voters. So more people will be drawn into the top rate of income tax, capital gains tax, and paying dividends. Council tax will rise. The social care cap cost is to be delayed for two years. The windfall tax on energy companies is expected to raise double the sum anticipated in May.
Liz Truss’s opposition to such taxes, like Trussonomics itself, was buried alive by the Chancellor yesterday. “You cannot borrow your way to growth”, he said to the Labour MPs sitting before him, but the message was really for the Truss diehards ranked behind him.
Out went her market-friendly advisers, such as Julian Jessop and our columnist Gerry Lyons. In comes Michael Barber, veteran of the Blair era though also consulted by Johnson, to advise on skills. In too is Patricia Hewitt, a Tony Blair and Gordon Brown-era Labour Cabinet Minister, no less, to advise on Integrated Care Boards.
All this will enrage some Conservative MPs and Tory publications. But there is a case for not taking the numbers as seriously as Hunt did. Yes, taxes will undoubtedly rise and there seems little room for much giveaway pre-2024. But, no, the usual rule of financial statements hasn’t been suspended – namely, that forecasts are the numerical equivalent of sifting chickens’ entrails.
The Chancellor told the Commons that “this year, the economy is still forecast to grow by 4.2 per cent. GDP then falls in 2023 by 1.4 per cent, before rising by 1.3 per cent, 2.6 per cent, and 2.7 per cent in the following three years”. Frankly, neither he, the OBR nor anyone else have a clue what the growth rate will be in 2026.
One might as well ask Richard Hughes, and his distinguished fellow members of the OBR’s Budget Responsibility Committee, to guess how many points Matt Hancock will acquire on his next disgusting jungle mission as by how much the economy will grow in four years’ time, or even this year.
How can they possibly know what turn Vladimir Putin’s war in Ukraine will take, or whether China’s economy will suddenly contract, or what black swans will beat their wings? Hunt and Sunak will be crossing their fingers and hoping that inflation comes in lower and growth higher than expected.
The crucial element will be interest rates. “The OBR says today that the lower interest rates generated by the government’s actions are already benefitting our economy and sound public finances,” the Chancellor told the Commons, and one could almost see him surreptitiously crossing his fingers.
If the headwinds which he mentioned abate, there may indeed be some room for modest tax cuts before the next election, and the bulk of those reductions in the rate of spending may never happen. One even imagine Sunak sneaking back, John Major 1992-style, over the winning line in 2024.
But that is unlikely and if it happened one would ask – for what? Clinching one’s opponents in a boxing ring may keep you on your feet. And Hunt had no option today but to deploy the gambit. But it means that you can’t land a winning punch, either – or build for a win on points.
The Chancellor presented no convincing economic vision today, especially when it came to measures to boost growth. There was a nod to energy efficiency, perhaps drawing on work of Nick Timothy and his five fellow authors; some protection for infrastructure spending; a bit more devolution; more money for research and development.
Nonetheless, the Government is trapped on housing and, until or unless something changes, the key obstacle to higher growth and intergenerational justice will remain. Nor is it clear what its plans are for business taxes, with the superdeduction about to run out.
Talking of the gap between the generations, there was no clear political message either. Yes, Sunak and Hunt are set on preserving their core vote among older people. That much is clear. But when it comes to the trade-offs between protecting the vulnerable and supporting the just about managing, where does the Government stand?
Hunt’s rhetoric smacked of pre-2010 Big Society-era Cameronism: “protecting the most vulnerable”, a sub-section of his speech today read. “To be British is to be compassionate and this is a compassionate government,” he said near the off. But there was lot of post-2010 Red Wall-style politics: northern infrastructure, help for renters, a minimum wage rise.
If the Chancellor had a short-term plan today, artfully briefed so as to depress expectations, there was little sense of a long-term one. To cut to the chase, we have had 12 years of Conservative Government and the country feels no more conservative at their end than at the start – for all Michael Gove’s school reforms and Iain Duncan Smith’s Universal Credit.
Lots of Tory voters, Party activists and many others want lower taxes – and, some, a smaller state, a bigger society. But if there is to be less supply of government, thus making room for both, there must be less demand for it, too. Sunak has had little time to think about these matters – as he fire-fights – but how would one know that he was doing so?