Jeremy Hunt is unlikely to give his name to a new economic model or ground-breaking method of boosting growth. Trussonomics is dead and all the new chancellor can do in the midst of the current crisis, and given the constraints he has immediately placed upon himself, is replace it with an orthodox mix of public spending cuts and tax rises to win favour with the financial markets.
In his first interview as chancellor, Hunt was sombre about the task facing him.
As master of ceremonies, overseeing the funeral of his leader’s economic plan, he signalled that a rise in corporation tax from 19% to 25%, planned by Rishi Sunak last year and scrapped by Kwasi Kwarteng in his mini-budget, will go ahead as the first of many policy U-turns to be announced in a full-scale budget a fortnight tomorrow.
Hunt said he wanted to protect the 1p cut in income tax, but left no one in any doubt that it was likely to be delayed or scrapped altogether.
Kwarteng’s long list of smaller tax cuts – bundled together in a package of so-called supply-side reforms, when they are mostly giveaways to the City and wealthy business people – are also expected to be thrown overboard.
The £2bn cost of easing restrictions on the taxes of consultants and owner-managed businesses, known as the IR35 rule and which critics dubbed a “fraudsters’ charter”, will be buried along with VAT-free shopping.
Such U-turns will save a few more billions of pounds over the five years he will be expected to balance the books and bring down the ratio of debt to gross domestic product (GDP).
The Office for Budget Responsibility, the Treasury’s independent forecaster, will want to see a much larger shift in policy to close a £60bn gap in public spending that has opened up since it last judged the government’s finances back in March.
Only £21bn disappears with the reinstatement of the 45p higher income tax rate and Kwarteng’s £19bn corporation tax cut, leaving almost £40bn to find.
Hunt made it clear that he expects the gap to be filled by spending cuts and further “efficiencies” across Whitehall.
The health service, social care, the defence budget and education were going to be protected under Sunak’s tax raising plans. However, the damage done to the economy by the last three weeks of turmoil on financial markets has meant this will no longer be possible, said Hunt.
A recession is coming and that will knock almost £20bn off the government’s revenues, according to the Institute for Fiscal Studies, which produced the analysis showing the total deficit in 2026 would be about £60bn.
Interest rates are going to rise more than they otherwise would have done, increasing the costs of businesses and mortgage payers.
Manufacturing companies, battered by Brexit restrictions on trade and a shortage of skilled workers, are already suffering and the latest surveys show that the sector has entered a recession.
Services firms are going to suffer from households reducing their spending to cope with higher food costs.
It means that all Whitehall departments and public services will fall under Hunt’s gaze. In his rescue mission, they must all feel the pain.
There is a way out for Hunt, at least in the short term. The chancellor could review the measure that is little discussed, namely the £150bn energy price cap.
Liz Truss wants applause for adopting such a generous rescue package but, as the National Institute for Economic & Social Research (NIESR) has shown, it is hugely regressive in the way it protects the incomes of those who use the most energy.
NIESR has proposed a “variable rate” forcing energy suppliers to charge a higher rate per kilowatt hour over a certain threshold, saving the government tens of billions of pounds over the two-year life of the scheme.
It is possible for heavy users of energy who claim benefits to be compensated via the benefits system. This would protect disabled people and others who might lose out under such a scheme.
Kwarteng dismissed the idea, but it could play a large part in the budget by plugging the hole almost painlessly.
Financial markets will look much more favourably on reforms that save cash immediately rather than vague promises of Whitehall savings.
Such a move would also spike the guns of critics who accuse the government of using the crisis to further reduce the size of the state.
Trussonomics is dead and Liz Truss herself on political life support. Yet if Jeremy Hunt is to be her saviour, he will need more than austerity 2.0.
