Jeremy Hunt won’t enjoy today’s papers. “Tories soak the strivers,” agonises the Mail, the condemnation bolstered by a columnist’s lament: “And there was me thinking we’d voted in the Conservatives”. “From bad to worse,” says the Guardian. “Hunt paves the way for years of pain,” says the Financial Times. “Carnage,” predicts the Mirror. “Years of tax pain,” warns the Times.
But then his autumn statement was never going to be easy or please everybody. It had to meet multiple objectives, some of which are contradictory in the short term; it was positioned to pursue a total fiscal effort that is greater than what I believe is strictly necessary, and it had to reconcile economic and financial realities with political and institutional priorities.
The morning after, it seems clear that what was announced in yesterday’s notably sober speech set aside quite a bit of what many may think of as Conservative party ideology. Instead, there is a pragmatic multi-year approach that, in sharp contrast to the prior government’s approach, opts for economics over politics in the driving seat. While well positioned to meet the immediate market test for fiscal responsibility, its longer-term benefits will, however, erode unless more is done to promote high, inclusive and sustainable economic growth.
The domestic context for the statement and its implementation is far from an easy one. Inflation has risen to 11.1%, a rate not seen for 41 years and notably pushing up borrowing costs. The associated cost of living pressures are even more problematic for lower income groups whose inflation rate, according to the Office for National Statistics, has never been as elevated relative to that of the population as a whole.
It is not just about inflation, which, according to the forecasts from the Office for Budget Responsibility accompanying the statement, is projected to stay elevated at 7.4% next year. Unusually for periods of such high inflation, the economy is already shrinking, slipping into a recession that, according to the OBR, will involve a GDP contraction of 1.4% in 2023 and, according to the Bank of England, could well extend into 2024. As a result, average household income per person would experience a record fall to a level last seen some 10 years ago.
This is not an easy environment to pursue policies that simultaneously put the budget on a sounder footing, contain inflation, restore the country’s economic reputation, protect the most vulnerable segments of our society and promote growth and productivity. It amplifies the challenges facing a government seeking to subsidise energy consumption – albeit less than the previous government – protect pensions and stabilise the debt burden after the massive Covid fiscal transfers.
Fortunately for the chancellor, the external environment is less jittery than when the previous government made its ill-fated mini-budget. Helped by inflation rates in the US falling faster than consensus forecasts, global interest rates have come down and sterling has strengthened, serving to lower interest costs and imported inflation. Indeed, these key market variables are more favourable for the UK than they were on the eve of the disruptive mini-budget.
Against this background, the chancellor announced a “stability, growth and public services” approach whose headline, at least on the surface, appears like a typical Conservative party budget – that is, a large dose of fiscal responsibility amounting to £55bn, more than is necessary in my opinion; just over half of which is to be met through spending cuts rather than tax increases. The details, however, point to a more pragmatic approach, with economics dominating politics – a sharp contrast from the last Tory government’s approach – and with the rich carrying a significant part of the burden for a tax-to-GDP ratio rising to its highest level since the second world war.
Judging from history, quite a few of the tax measures would not have come easy for a Tory government. This includes higher and broader windfall-profit taxation of the energy sector, a cut in dividend allowance, an expansion in the coverage of the top rate of income tax, a reduction in the annual exemption for capital gains, and larger business contributions to national insurance. The reduction in expenditures is backloaded, with most of the cuts biting during the next parliament. The national living wage is being increased by nearly 10% while, on the spending side, education, health and social care are being treated relatively favourably.
This does not mean that lower income groups are unaffected. Particularly through what economists call “fiscal drag”, more people will be pulled into the tax net as the minimum threshold for paying taxes stays constant at a time of higher nominal wage growth.
The real issue with an autumn statement that traded big bang measures for many smaller ones is not about narrow fiscal issues. It is much more about the high, inclusive and sustainable growth that the UK needs to address the vast majority of its economic and financial challenges. While the government rightly emphasised the trifecta of energy investments, infrastructure modernisation and enhanced innovation, this is unlikely to constitute enough of a policy package to promote the needed productivity enhancements and economic growth.
At a time of a slowing global economy and tightening financial conditions around the world, the government will need to keep a particularly close eye on the evolution of the country’s growth dynamics lest its desire for restoring fiscal credibility turns into excessive self-defeating austerity. More will be needed to, using the chancellor’s words, turn the recession made in Russia into a recovery made in Britain.
His statement will need to be followed by stronger measures to overcome the legacy of too many years of sluggish productivity and of low and insufficiently inclusive growth; to redefine the UK’s international economic relations post-Brexit; and to reorient the economy for a greener and more dynamic future.
Without that, history may see it as little more than a well-intended, but insufficient attempt to restore dynamism and fairness to the British economy.
Mohamed El-Erian is president of Queens’ College, Cambridge. He was chair of President Obama’s Global Development Council (2012-17) and is author of The Only Game in Town and When Markets Collide
