It is time “to focus on growth”, intoned the chancellor, Jeremy Hunt, on Friday. The economy, he seems to think, has turned a corner. Before Wednesday’s autumn statement – the biggest set-piece economic event of the year – anticipation on Tory backbenches and in the rightwing media is beginning to run high, as estimates about his potential largesse balloon. A focus on growth in their eyes can have only one meaning: buying back popularity with tax cuts.
It is breathtakingly wrong. Tax cuts, especially the widely mooted deep cuts to inheritance tax that Hunt is said to be considering, will do little for growth – instead choking off a much-needed source of revenue and inflating inequality. That they should be framed as crucial supports to aspiration, enterprise and growth is tribute to the huge rightwing bias in our national conversation, with the reasons for the prolonged stagnation facing us going largely unacknowledged. Britain is suffering from an intensifying four-decade-long investment drought in the public and private sectors – the root cause of the crisis in stagnating productivity and living standards that shapes our politics and daily lives. Every spare pound should be consecrated not to tax cuts but to raising public investment – a key trigger for increased private sector investment and, ultimately, a better future.
The IMF has calculated that the combination of selling off so many public assets cheaply, refusing for decades to invest in those that remain – hospitals, schools, transport – along with commitments to pay pensions without creating accompanying pension funds to discharge the liability, mean that public sector liabilities represent an astonishing 96% of GDP. If Britain’s public sector had a balance sheet like a private company, identifying both public assets and liabilities, its net worth would be in the red by more than £2tn.
The extent and speed of the deterioration in the public sector’s net worth since 2000 is stunning – comfortably the fastest in the G7, on the IMF’s definition. It should be no surprise. In an ideological universe in which all wealth is imagined to be created by private enterprise, public investment is a permanent Cinderella. Margaret Thatcher’s election marked the moment when British priorities were disastrously upended. Until 1980, public investment had averaged 4.5% of GDP; between 1980 and 2023 it has averaged 1.5% of GDP – a short interlude of rising public investment under New Labour, immediately reversed by the coalition and then the Tory governments of the 2010s. It now runs at half of what it needs to be, according to the National Institute of Economic and Social Research; it should be doubled.
One obvious crisis area is our national infrastructure, the foundation on which growth is built. Britain, as the National Infrastructure Commission said forcibly last month, must lift its spending on infrastructure to at least £70bn a year and keep it there for decades if it is to have any hope of matching the transport, digital, housing, water, waste disposal and energy infrastructure enjoyed by other advanced countries – let alone to overtake them. The NIC says that £30bn of those funds can only come from government. Seven years after we lost the annual £6bn that the European Investment Bank used to lend, the UK Infrastructure Bank, if it does well, will succeed in lending half that annually by 2030. In addition, there is abject investment in research and development. Nero was said to have fiddled while Rome burned; we have a legion of rightwing commentators, thinktanks and Tory MPs babbling about tax cuts while Britain burns.
Pre-budget opacity and secrecy abounds; in a grownup country a column like this could be written in the light of the projected spending, tax and borrowing figures. No chance. Instead we rely on informed guesses. We do know that tax revenues have been buoyed by far higher inflation and pay settlements than when thresholds were frozen for six years. Some City estimates suggest that, far from the tiny margins that the chancellor thought he was operating within last spring, the Office for Budget Responsibility will have told him (congruent with meeting his target for shrinking national debt in five years’ time) he might have up to £26bn to “give away”.
How to spend it? A serious chancellor in a serious government would take a rounded picture – the living standards of the people, especially the poorest, the state of public services, the wider needs of the economy, the sustainability of debt service, the weaknesses of the public sector balance sheet, our infrastructure and public investment needs. This is what a growing economic consensus, including the IMF, now urges. Focusing on debt and deficits alone without connecting them to investment or the wider public balance sheet, and trusting in tax cuts rather than public investment to stimulate “enterprise and aspiration” may be Tory economic policy – but it is fossilised, redundant economic thinking.
Yet even if his party allowed him to be a serious chancellor, Hunt has shown no interest in developing a public sector balance sheet; if he did, it would remove the case for tax cuts completely. Yet within this second-best world, two floated measures will be steps in the right direction. Expect companies to be allowed fully to offset investment against corporation tax for at least another year – or even permanently. This is the only “tax cut” that has ever been proven to raise investment. And Hunt will begin the vital consolidation of our absurd pension fund structure – myriads of small pension funds producing low returns but not investing in Britain.
Besides the challenges we face, there is no urgency or concerted effort to do everything possible to turn our economic trajectory around. The story should be investment, investment, investment – not bungs for the rich via inheritance tax cuts or worsening the already hard-pressed living standards of those at the bottom by shaving the proper indexation of welfare benefits – another floated measure. Since Brexit, inward investment, so important to an open economy like Britain’s, has shrunk alarmingly: no longer do we have full, unfettered access to crucial EU markets, and foreign companies are voting with their feet. Yet there is zero effort to correct this self-inflicted harm.
Our infrastructure is lamentable. Our public balance sheet is ruinously weak. Business investment is far below what is needed. We are going nowhere as a country. The autumn statement will scarcely shift the dial.
• Will Hutton is an Observer columnist
