The economy is set to grow less rapidly. Inflation is expected to be higher. Yet Jeremy Hunt managed to offer big tax cuts to businesses and workers and do so without boosting borrowing.
If that sounds too good to be true then that’s because it is. The chancellor has pulled off a classic “live now, pay later” ploy in which pre-election tax cuts are paid for by implausibly tough public spending plans in future years.
Some of what Hunt announced was welcome. Business investment may well rise over time in response to the decision to make 100% capital allowances permanent. His 110 measures to boost growth may eventually bear fruit. That said, there was a smoke and mirrors quality to the chancellor’s statement.
The Office for Budget Responsibility – which has the job of independently scrutinising the government’s fiscal arithmetic – made this clear in its own dry, understated way.
It noted, for example, that keeping to existing plans imply cuts in real terms of up to 4% for those departments with ringfenced budgets – something that will prove challenging at a time when the backlog of cases in the courts is already at record levels and councils are going bust. The OBR highlights a report from the Institute for Government thinktank that found that performance in eight out of nine public services had deteriorated since 2010, with schools the sole exception.
Put simply, the OBR doubts whether the existing plans – which would involve a new wave of austerity – will be adhered to. “As previous spending reviews have approached, governments have topped up annual day-to-day spending envelopes significantly: by £39bn (14%) on average in the year up to the November 2015 spending review, and by £32bn (8%) in the October 2021 spending review. The outlook for departmental spending is therefore a significant and growing risk to our forecast.”
That’s not all. The revenue side of the fiscal projections assumes that a 5p-a-litre cut in fuel duty will end in April and that the levy will then rise in line with inflation. Nobody seriously expects this to happen in an election year, but the cost to the exchequer is around £6bn a year. Fuel duty has not risen since 2011. And after a package that was targeted squarely at the “white-van man”, the idea of the chancellor putting up fuel duty in the spring by 8p a litre is for the birds.
Still, as far as Hunt is concerned, all this is a problem for another day. In the meantime, he can use the extra headroom provided by higher than expected revenues to reverse some – but by no means all – of the tax increases in the pipeline. The rises announced between the budget of 2021 and the autumn statement of 2022 will raise a total of £45bn by 2028-29. The cut in national insurance announced by Hunt will cost £10bn. And, as the OBR notes, tax as a share of national income is still on course to rise in each of the next five years to hit a postwar record of 38% of GDP.
The good news for the chancellor is that wages have just started to grow at a faster rate than prices, and that trend is likely to continue into next year. The bad news is that real incomes have been savaged during the cost of living crisis and are not expected to return to pre-pandemic levels until 2025.
So, to sum up: in what is expected to be the general election year of 2024, the economy will show barely any growth (0.7%), taxes will go up, public services will remain under pressure and people will end the parliament poorer than they were at the last election in 2019. Not the easiest of records to sell.
