An economy going nowhere. Limited financial firepower. Polls suggesting the Conservative party on course for a wipeout at the general election. Tory MPs clamouring for tax cuts. Jeremy Hunt is under real pressure to announce a gamechanging autumn statement on Wednesday. Rarely has a chancellor been so poorly positioned to do so.
Hunt has been at the Treasury for just over a year but by the standards of the current parliament, that makes him a veteran. He is the fifth chancellor since 2019 and three of his predecessors – Sajid Javid, Nadhim Zahawi and Kwasi Kwarteng – were so short-lived in office that they failed to produce a single budget between them.
Unless something untoward happens between now and next spring, Hunt will stand outside 11 Downing Street for the traditional picture of the chancellor holding aloft his red box and will be hoping then to be in a better place to provide the pre-election giveaways his anxious backbenchers are demanding.
For now, though, money is tight, although a bit less tight than it appeared to be in the spring. Back then, the government’s spending watchdog – the Office for Budget Responsibility – said Hunt could meet one of his two fiscal rules with £6.5bn to spare. Higher inflation and the impact of fiscal drag – workers paying more tax because allowances and thresholds have been frozen – mean Hunt has double that amount of headroom.
Ruth Gregory, a UK economist at Capital Economics, says this would still be well below the average £25bn headroom since 2010, and be unusually slim at a time when the inflation and interest rate risks were high. It would not take much of a deterioration in the OBR’s economic forecasts to wipe out the headroom altogether, she warns.
The challenging state of the public finances explains why Hunt has been playing down expectations for Wednesday’s package. The emphasis, he insists, will be on improving the economy’s growth potential through a series of supply measures aimed at stimulating business investment, boosting public sector productivity and encouraging more sick and disabled people to find work.
These are worthwhile objectives but the measures Hunt announces will take time to have an impact, assuming they work at all. They certainly don’t appear to add up to a voter-friendly offer that would claw back Labour’s huge opinion poll lead.
Hunt is wary of cutting personal taxes at this point, fearing it would add to inflationary pressure and prompt the Bank of England to keep interest rates higher for longer than would otherwise be the case. The sharper than expected fall in inflation last month means this argument carries less weight than it did, especially since some of the easing of price pressures was because of the weakness in the economy. The latest retail sales figures show spending in the shops and online at its lowest level since the economy was in lockdown in early 2021.
If there is money to spare, the chancellor’s preference would be to cut business taxes by extending 100% allowances for investment – currently due to expire in 2026 – until 2027. If political necessity means bowing to pressure to cut taxes, he may opt to cut inheritance tax or stamp duty rather than tinker with the three big money raisers: income tax, national insurance contributions and VAT.
The chancellor could raise some extra cash by trimming the government’s welfare bill. Uprating benefits in line with October’s inflation rate (4.6%) rather than September’s (6.7%) would net £2bn, while using average earnings excluding bonuses to calculate the triple lock increase in pensions would raise a further £1bn. The government’s plan to boost worker participation in the labour market includes sanctions that could lead to welfare claimants who “refuse” to engage with their jobcentre or take work offered to them losing their benefits.
In the context of a £2tn-plus economy, these are relatively trivial sums: the Treasury equivalent of a financially squeezed householder searching down the back of the sofa for a pound to feed the gas meter. What’s more, all would be politically risky.
Speaking to the Guardian, the former prime minister Gordon Brown said: “If Hunt goes ahead with cuts in the social security budget it will plunge hundreds of thousands of claimants into further poverty. If they are going to fund tax cuts through cuts in social security it will be the harshest form of austerity.”
Hunt’s need to scrabble around for cash reflects the fact that he has two intertwined problems. The first is that the economy has been suffering from a combination of weak growth and high inflation. Rising interest rates have made it more expensive to service government borrowing. Hunt said last month that debt interest payments were on course to be at least £20bn higher than the OBR envisaged at the time of the budget.
The second problem is that the economic and political cycles are misaligned. Normally, governments try to get all the tough decisions out of the way early in a parliament in the hope that the economy will be performing strongly and the public finances buoyant before the next election comes around.
Covid-19 – which arrived within months of the 2019 election – forced the Treasury and the Bank of England to stimulate the economy in the first 18 months of the current parliament. Borrowing soared and interest rates were cut to 0.1%, but the government’s success in avoiding mass unemployment during the pandemic came at a cost. Taxes have risen as the Treasury has sought to repair the damage to the public finances, while the Bank has raised official borrowing costs 14 times since December 2021 in order to tackle the highest inflation in 40 years.
Things could actually be worse for the chancellor. The economy might easily have been in recession by now rather than flatlining. Real incomes – pay adjusted for inflation – have started to rise again in recent months. The financial markets believe interest rates have peaked. And, despite the impact of higher debt interest payments, public borrowing has come in lower than expected, giving Hunt a few more options.
George Buckley, an analyst at the Japanese bank Nomura, says: “The chancellor is fortunate that better public finance out-turns have given him a near-term fiscal buffer, a portion of which we expect the government will want to spend to help its challenging electoral circumstances. But equally, Hunt will undoubtedly want to keep some of his powder dry in the run-up to next spring’s budget – which may be a more opportune time to win over voters before a possible autumn 2024 election.”
Labour’s attack lines have already been honed. Rachel Reeves, the shadow chancellor, will say the government has had 13 years to sort out Britain’s supply-side problems and failed to do so, and that Hunt’s measures fail to add up to a serious growth strategy.
History suggests few budgets or autumn statements linger long in the memory. Against the backdrop of weak growth and constrained public finances, Gregory says she thinks the chancellor will announce a modest giveaway package of about £9bn, or about 0.3% of the UK’s annual national output.
“The result may be a fiscal announcement that neither significantly boosts the government’s standing in the polls or the economy,” she says.
