Jeremy Hunt’s autumn statement is fast approaching and it looks like the public will be treated to the exciting spectacle of a chancellor treading water.
Hunt is in no mood to splash the cash when the financial markets still have a wary eye cast in his direction. Investors remember the panic that followed Liz Truss and Kwasi Kwarteng’s first and only budget, when the UK’s good name was sullied and, as a financial punishment, the cost of borrowing rocketed.
The Truss-Kwarteng debacle was little over a year ago and lives on as a vivid memory of fantasy economics turning quickly to chaos.
It goes without saying that Hunt would consider himself far from inactive. On Wednesday, he will talk about his efforts to improve the lot of unemployed people with a beefed-up system of support for those out of work due to health issues, disabilities or a lack of skills.
There will be more detail on progress towards the much-trailed revolution in childcare that he talked about in his budget in March and could – if he can find the staff – be ready to launch in the new year.
He also said on Friday that £4.5bn would be spent over five years from 2025 to invigorate business investment, which is small beer compared with Labour’s plans.
Surprises will be small-scale, at least in financial terms. There is speculation that a one-off energy subsidy for the low-paid will be included now there are forecasts of a rise in energy bills this winter.
He may signal that next March, should the public finances be in better shape, he could perform some very Tory tax cuts, and in particular that he could make dramatic reductions in inheritance tax for property owners.
While this is a costly promise, it could be couched, like the £4.5bn investment package, as a post-election gift, delaying its impact on government borrowing.
According to one tax expert, he may boost the government subsidy for private health insurance offered by employers, which is expenditure that could have helped the NHS, but instead will be used to undermine it.
This combination of modest spending increases and delayed promises – offset by steep personal tax rises, already taking a toll – will probably leave the chancellor on track to bring annual borrowing down to 1.3% of GDP in the fifth year of the forecast. In addition, this squeeze on borrowing will allow him to meet a self-imposed rule that government debt as a proportion of GDP be falling in 2028.
If all this amounts to furious activity, it is similar to the proverbial duck going around and around as it paddles with one leg. When every initiative is matched by a countervailing cut somewhere else, it amounts to austerity whichever way you slice it.
The question for Labour supporters is whether Hunt finds himself held back from being more expansive by ideology, or by the real-world constraints on extra borrowing imposed by financial markets.
While it is easy to characterise the limits on spending as self-imposed, with Hunt trapped by Tory MPs who object to the state as an engine of growth, many economists worry that high interest rates are acting as a brake on ambitious governments.
Olivier Blanchard, the former chief economist at the International Monetary Fund (IMF), was once a cheerleader for investment spending to boost the productive capacity and long-term growth potential of economies such as the UK’s.
He was one of a handful of economists providing a degree of heft to the arguments put by domestic thinktanks on the left – those that the public might reasonably presume would argue for more spending because that is where their politics leads them.
High borrowing costs, and the likelihood that they will stay high, have altered Blanchard’s view. In a paper, he said it was unlikely growth could be stimulated to exceed the new elevated rate of interest on government bonds, meaning debt-to-GDP ratios could balloon.
Ageing populations across the world are expected to make this problem worse, especially after 2030, when most of the baby-boomer generation will have retired. They will turn from being savers, and willing lenders to governments via their pension and investment funds, to becoming spenders in search of bargain holidays and tax cuts on inherited assets.
In this scenario, governments seeking to borrow may not find as many lenders queueing on the finance ministry steps to buy bonds as they have for the past 40 years.
With limits on borrowing, countries such as the UK will need to focus increasingly on generating investment funds from tax, and in particular taxes on the consumption habits of the better-off. This is an environmental policy that the rich will resist, calling it socialist (which it is). Unfortunately for them, it is the only policy that makes any sense in a world where the cost of borrowing is painfully high.
