Jam today, austerity after the next election – that was the thrust of the chancellor’s heavily trailed autumn statement last week. As expected, Jeremy Hunt announced tax cuts that the country can ill afford. But despite his claims to be focused on the long term, he is paying for these cuts by raiding the money that should be reserved for public services after the next election to help them cope with rising inflation.
If this further round of spending cuts is imposed, it will blight the lives of the people who disproportionately rely on Britain’s public infrastructure – children from disadvantaged backgrounds, older people with care needs, women suffering domestic abuse. It will also continue to suppress the country’s future growth prospects, perpetuating the austerity fallacy that cutting public spending makes good economic sense despite the fact that it inevitably shrinks future tax revenues.
Hunt could claim to have the money for these tax cuts because of the illusory impact of inflation, and its effect on nominal wages. Higher-than-expected inflation has driven nominal wage growth as employees seek to minimise the impact of the rising cost of living. These higher wages lead to a higher forecast tax take-up over the next three years. Hunt has spent virtually all of this forecast windfall on two big tax cuts: 2p in the rate of national insurance for employees (1p for the self-employed) and making permanent the full expensing of plant and machinery investment – meaning that businesses can claim back as tax relief anything they spend on this in the same tax year.
The telltale sign that these are illusory gains, delivered as a result of inflation rather than real economic growth, is that, despite wages increasing and delivering a nominal windfall to the exchequer, this is the first parliament over which average living standards are forecast to decrease; households will on average be £1,900 poorer by the end of this parliament compared to December 2019. Weekly earnings are not expected to recover to their 2008 level until 2028, an unprecedented two decades after the financial crisis.
This cash should rightfully have been channelled towards public spending, to help the public sector meet the rising costs of inflation. By diverting it to tax reductions, Hunt is loading a further round of painful real-term spending cuts on to public services after the next election. Analysis from the Resolution Foundation shows that outside the protected areas of health, education, overseas aid and defence, this would mean real-terms per-person public spending falling by 14% a year between 2022-23 and 2027-28. To put that in context, the equivalent amount cut by George Osborne during the coalition government amounted to 15% per person per year.
The difference between then and now is that our public services are already in a fundamental state of disrepair thanks to 13 years of neglect by Conservative chancellors. NHS waiting lists are at record highs; some school buildings are crumbling and the attainment gap between poor and more affluent children is again widening; children’s services and adult social care for older and disabled people simply cannot meet needs; and cuts to policing and the broader criminal justice system mean it can take years for even serious crimes to reach trial, if they do at all.
Moreover, despite the tax-cutting boasts, the figures show that as a result of “fiscal drag” – whereby growing numbers of people are pulled into higher tax brackets because thresholds do not rise with inflation and an anaemic economy – the tax burden as a share of GDP is going up. And Hunt’s giveaway disproportionately benefits the better-off – about 80% of the gains of the national insurance cut go to the most affluent half of households. If the chancellor were going to distribute cash ahead of the next election, it should have been targeted at disabled people and low-paid parents with children, who have suffered significant reductions to tax credits and benefits over the past decade.
Hunt’s illusion has left a nasty political trap for Labour if they win the next election. The shadow chancellor, Rachel Reeves, has pledged not to borrow to fund day-to-day spending; if Labour sticks to that promise it will have to fund any additional spending through tax rises. She has said that Labour will provide extra funding for public services through the rising tax receipts from economic growth. But the gamble here is how will Labour drive growth while the state of NHS waiting lists, adult skills provision and support for children falling behind will act as such a firm brake on the economy? This will be compounded by a fall in public investment that dwarfs the increase in business investment driven by full expensing; Labour’s promise to borrow to channel £28bn a year in green investment by 2027 does not come close to making up that gap.
Short of an economic miracle, no one expects any government, Conservative or Labour, to be able to stick to the spending envelope outlined by Hunt. It is magical thinking, and magical thinking from which there is little electoral incentive for Labour to deviate. Voters deserve a return to a politics that is honest about the trade-offs we face as a country: without funding to improve our public infrastructure, Britain will long be locked into a painfully low-growth future.
