Get ready for Austerity 2.0. The message coming out of 10 and 11 Downing Street is that a belt-tightening autumn statement will include both tax increases and public spending cuts. Ahead of Jeremy Hunt’s announcement on 17 November , the pitch is being carefully rolled.
The Treasury plans have a strong sense of deja vu about them, since the first economic act of David Cameron’s coalition government in 2010 was a £40bn package of measures designed to balance the books. Back then, the global financial crisis had punched a hole in the state’s finances; in 2022 the damage has been caused by the pandemic and Russia’s invasion of Ukraine.
A number of factors has led to the deterioration in the public finances. Growth has been weaker than the independent Office for Budget Responsibility expected when it last passed judgment on the state of the economy in the spring. Higher inflation has meant interest payments on the government’s debt have increased. Finally, there have been specific government decisions including support for energy bills and the reversal of April’s increase in national insurance contributions.
The Institute for Fiscal Studies thinktank reckons borrowing in the current 2022-23 financial year will be £94bn higher than the £99bn estimate made by the OBR in March, and that by 2026-27 borrowing will be £103bn – £71bn higher than forecast in the spring. Without action, the IFS says, debt as a share of national income will continue to rise.
Liz Truss’s plan was to reduce borrowing by using tax cuts to stimulate the economy, on the grounds that faster growth means higher tax receipts, lower welfare benefits and a smaller deficit. This experiment proved short-lived and the orthodoxy Truss railed against has regained the ascendancy. The autumn statement will be about reassuring the financial markets that debt as a share of national income is on a downward path with something to spare. This requires tax increases and spending cuts of at least £40bn, perhaps even £50bn if Hunt wants to be extra cautious.
Back in 2010, the then chancellor, George Osborne, plumped for an 80:20 split between spending cuts and tax increases, but it appears Hunt will take a more balanced approach and opt for a 50:50 split.
A higher windfall tax on the excess profits of oil and gas companies operating in the North Sea looks inevitable, but won’t be enough on its own to meet Treasury demands. The Resolution Foundation thinktank says there are other ways of raising and saving money, although none of them are easy.
Cutting capital spending might raise £10bn, but paring back public investment would be the “anti-growth” option, according to the Resolution Foundation. The “austerity” option would raise £20bn but would require cuts in day-to-day spending for departments other than health and defence of 9%. That’s on top of the real-terms fall in departmental spending caused by higher inflation.
Rishi Sunak could renege on his promise to raise benefits and the state pension in line with inflation, saving £9bn. But the “income-cutting” option would mean a living standards hit of £750 a year to a low-income family with two children.
Finally, the thinktank says, there is the “tax-raising” option. Apart from a beefed-up windfall tax, Hunt could reinstate Sunak’s increase in NICs, raising £22bn, extend the freeze on income tax thresholds or making pension tax relief less generous for those on higher incomes.
In all likelihood, all four options will be explored. The one crumb of comfort is that the tough action from the Treasury means less pain will be inflicted by the Bank of England. Interest rates are still going up – but not by as much.
