A WAFER THIN STATEMENT

Jeremy Hunt’s Autumn Statement ignores Britain’s obvious longstanding problems. Rather than address them, he conjures up a phantom problem of his own making, which his proposals will probably make worse. It is failure on a grand and disgraceful scale.

The touchstone of his Autumn Statement is this: what is he trying to achieve, and how will we know whether he has achieved it? By extension, what is he prepared to sacrifice in his attempts to achieve his aims? What’s in, what’s out?

There is a list a mile long of what would be worth aiming at, and these are mainly the things which have been allowed to deteriorate by previous governments. They are a big part of why the country faces the current combination of recession, inflation and international financial scepticism. But none of the UK’s economic, financial and social problems can be solved if the economy isn’t growing.

So what is he about? In the beginning is the word, so here’s Hunt’s gospel, paragraph 1.1:

1.1 Sustainable public finances provide the stability and confidence that underpin the economy, supporting businesses and households across the country. By taking the responsible decisions needed to achieve fiscal sustainability, the government is providing the necessary conditions for economic growth.

Questions needing answers are: by what measure are public finances judged sustainable/unsustainable? By what measure are decisions judged “responsible”?

He is very clear about his criteria for sustainability: public debt as a % of GDP should be falling. Without the measures he outlined, he warned, “underlying debt would have been rising by 1% of GDP in 2027-28”. Gosh, 1% of GDP over five years – call the fireman.

Then he segues: “Ensuring that debt as a share of GDP falls over time allows the government to fund high quality public services while preserving its ability to support households and businesses in the face of economic shocks.”

Over time, maybe this is arguable. But right now, does he not realize that he is the economic shock? And that in the meantime, with only a couple of exceptions, he is planning to cut spending on public services in nominal and real terms?

But how reasonable is this as a vision of sustainability anyway? Why choose now to decide to lower debt/GDP? He knows this is a problem, so advances various defensive arguments:

“Several other countries have reaffirmed their commitment to return to fiscal discipline in the medium term, including reducing debt as a share of GDP,” he says…

The UK gets a recession roughly once every nine years, “and a typical recession could add an average of 10pps to the debt-to-GDP ratio,” Hunt explains. Well, I guess we’re going to test that one out right now…

An aging population poses challenges to the public finances that will materialize over the coming decades…

Reducing debt as a share of GDP will also help to reduce spending on debt interest, he argues. A one percentage point increase in gilt rates could raise debt interest spending by £9.5 billion in 2026-27, compared to £6.0 billion in March 2022. Similarly, a £10.0 billion annual increase in the government’s cash requirement could mean debt interest spending rises by £1.6 billion by the end of the forecast…

But what we have here are not arguments for sustainability, rather simply for lower government debt/GDP, right now. That’s even though doing so will be vigorously pro-cyclical at a time when he knows we’re headed into recession.

Granted, he sounds superficially plausible, because it is self-evident that at some stage some level of public debt must eventually turn out to be “unsustainable”. Yes, but that is like saying that if you keep eating too much then eventually, like M. Creosote, you will burst. That is not an argument for skipping breakfast. You might need breakfast to get you through the day.

So let us consider whether we are turning into M. Creosote. For this I turn to the ONS’s update on UK general government debt, published in June this year. This reveals two things. First, general government debt is already falling as a % of GDP. Let me repeat that for Mr Hunt: falling.

Second, even today, with debt at 105.6% of GDP, UK’s general government debt was 29.1 percentage points lower than the G7 average.

In other words, the current debt and fiscal reality is that we are among the last country in the developed world to face M. Creosote’s fate.

Then there’s the matter of timing. Hunt says the Autumn Statement policy decisions begin to reduce borrowing from 2024-25, “when the economy is in recovery and unemployment begins to fall”.

But that’s not an economic forecast the Bank of England recognizes, even before Hunt’s fiscal squeeze gets its grip. Its central forecast, before Hunt’s pro-cyclical fiscal squeeze, is for the economy still to be in recession in FY24/25. The Bank of England expects unemployment to be still rising in in FY24/25, and in FY25/26 as well.

Happily for the Chancellor, however, the OBR has discovered itself to be much more cheerful than the Bank of England, expecting a recession of 1.4% in 2023 to be rapidly reversed by 1.3% growth in 2024, with growth doubling to 2025 in 2025, based on surging business investment and a sharp recovery in Britain’s trade balance. Happily, it also sees unemployment rate peaking at 4.9% in 2024 and to be in steady retreat in 2025, backed by a sustained recovery in productivity growth.

Hunt needs the OBR’s optimism to be better founded than the Bank of England’s dour outlook. It’s not clear at all that this will be the case.

All the same, right here, before we consider the scope and variety of Hunt’s inflictions, we are in a position to make three assertions:

First, by international comparisons, our fiscal and debt position are relatively favourable, and in no danger of proving “unsustainable” in the short to medium or even visible-long term.

Second, even by Hunt’s proclaimed rules, general government debt is already falling as a percentage of GDP – the metric it appears He worships above all. We’re already doing it!

Third, Hunt is assuming a more favourable medium-term economic outlook, and earlier recovery, than the Bank of England at least expects. And that’s before he gets around to cutting spending and raise taxation.

So much for the Chancellor’s general argument. Now let’s look at the overall totals for tax and spending, and the priorities revealed by them.

Here he is quite canny: during 2023/24, excluding the £12.78bn spent on the Energy Price Guarantee, net government spending is to rise by £2.03bn, with taxes rising £7.41bn and spending to rise £9.45bn. The squeeze really starts the following year (2024/25), coming in at a £10.2bn net squeeze, with the Energy Price Guarantee ending, taxes rising £14.7bn, and total spending rising only £4.7bn.

The net squeeze more than doubles to £24.77bn in 2025.26, rising again to £41.4bn in 2026/27 and £54.91bn in 2026/27.

Quite how this longer-term squeeze will really be achieved remains mysterious. However, the priorities in the short to medium term are easily judged by looking at the targets for spending (Department Expenditure Limits). Overall, his plan is to budget for nominal spending ex-depreciation, with allowance for shortfall, of just 0.6% in 2023/24 falling to 0.5% in 2024/25. If double-digit inflation isn’t going to collapse into dramatic deflation, this means in real terms overall spending is being cut dramatically.

Taking in the broadest view of government spending, including capital spending, the plan is for it to rise 1.4% in 2023/24 (47.2% of GDP) and then to fall 1.5% in 2024/25 (44.9% of GDP). But who wins, and who loses, over that timeframe?

Health & Social Care, up 4.8%, then 2.4%, with NHS up 5.1% then 3.4%

Education: up 5.3%, then 1.7%

Home Office: up 5.5%, then 0.7%

Scotland: up up 3.4%, then 1.1%

Good for them. But every other department is looking down the barrel of straightforward cuts in nominal budget: Defence; Single Intelligence Account; Foreign, Commonwealth & Dev Office; DLUH Levelling Up; Housing and Communities; Transport; Digital/Culture/Media/Sport; Environment Food & Rural; Int’l Trade; Work & Pensions; HM Revenue and Customs; Treasury; and the Cabinet Office.

It all adds up to a narrowly restricted set of aims: health and education, the police, and Scotland are the priorities to retain a reduced level of protective government interest. Any other priority is abandoned. And none of Britain’s long-standing problems are addressed or solved.

But at least we’ll be sustainable in our poverty.