Liz Truss is about to be removed, like Leon Trotsky, from the history books. Just as Joseph Stalin removed mention of his rival from accounts of the Russian Revolution, so Thursday’s autumn statement will do its best to airbrush out evidence of Truss’s brief stint as prime minister.
It will fall to Jeremy Hunt to deliver the latest in a series of mini-budgets, but there is no question this is a joint operation between the neighbours at 10 and 11 Downing Street. This is the sort of autumn statement that Rishi Sunak would have made had he not been thwarted by Boris Johnson during his time as chancellor, or beaten by Truss in the summer leadership race.
To say Hunt and Sunak face a tricky balancing act is something of an understatement. The economy contracted in the third quarter and may go on contracting for some time to come. There is precious little time to turn things round before the next election. Hunt has repeatedly warned he has bad news to announce on Thursday, with reports that he will raise taxes and cut spending by £50-60bn.
In short, the Treasury is about to announce a package of measures that will make the recession worse, even though time is running out before the government has to go to the country. The only real comparison is with Sir Geoffrey Howe’s 1981 budget, which withdrew support for households and businesses through the tax and spending system, even though the economy was in recession. At least then, the austerity package was accompanied by lower interest rates from the Bank of England. This time, the risk is that Threadneedle Street and the Treasury will be turning the screw at the same time.
Hunt thinks he has no alternative. That’s partly because spending cuts and tax rises are expected by the financial markets. But it is also because the Treasury thinks that leaning against the wind would be counterproductive, because it would add to inflationary pressure and lead to even steeper rate rises from the Bank.
Hunt and Sunak believe rate increases need to be kept to a minimum if the Conservatives are to have any chance of winning a fifth election. Already, there are signs of the housing market weakening. Mortgage approvals are down, reflecting weaker demand from buyers.
Some softening of the housing market was inevitable as soon as the Bank started to raise interest rates from their record low of 0.1%. Mortgage affordability is a function of two things: house prices and the cost of borrowing, and as interest rates go up, so does the cost of servicing a home loan. Mortgage rates of 6%-plus are incompatible with ever-rising house prices. Given the importance of the housing market to the economy, the last thing Hunt wants is to turn a house-price correction into a full-blown crash. The autumn statement is designed to give Threadneedle Street a reason to go easy.
Another obvious risk for Hunt is that austerity locks the UK into a low-growth, high-deficit cycle in which slowing activity leads to lower tax revenues and pressure for still more cuts. The director general of the Confederation of British Industry, Tony Danker, is concerned that there will be nothing in the autumn statement to encourage business investment, and he is right to be worried. Low levels of investment – public and private – have been a longstanding weakness for the UK and the Treasury should resist the temptation to cut capital spending. It could also announce a replacement for the two-year super-deduction, due to expire in April, which offers companies tax relief on productivity-boosting investments.
So what can we expect from Hunt on Thursday? The framing of the autumn statement will be about getting on top of Britain’s cost of living crisis. The inflation figure for October comes out on Wednesday and is likely to show a further increase in the annual rate from 10.1% in September to somewhere close to 11%.
That, though is likely to be the peak and – unless something unexpected happens – inflation will fall rapidly next year. Hunt wants the autumn statement to be judged on the basis of what happens to inflation because he knows inflation is going to fall anyway. Already, some of the factors behind the inflationary surge in 2021 have started to abate. To take one example, the lack of computer chips has turned into a glut and prices have fallen sharply. It is a similar story with wholesale gas prices.
Two other things are worth looking out for. First, Hunt is likely to raise pensions and state benefits in line with inflation to be able to claim his measures are unavoidable but fair. In truth, the removal of financial support provided during the pandemic means people on benefits will still be worse off even with a 10% increase, but the headlines will still be about how the chancellor has protected the poor.
Second, much of the fiscal pain from spending cuts and tax rises will be deferred until later. There is an economic and a political rationale for this. The economic argument for deferring the tightening is that it avoids imposing more pain when the economy is already vulnerable. The Treasury will be hoping the boost from its energy price support package helps activity over the winter and that the economy is out of recession before most of its measures take effect.
Politically, it also makes sense to delay the worst of the spending cuts and personal tax increases until after 2025. Hunt and Sunak can then be rewarded by the markets for their tough action while putting Labour on the spot. Deferring implementation of measures until the next parliament means the Conservatives can put Sir Keir Starmer under pressure to commit to sticking to the plans.
Clearly, a poison pill is being prepared for the leader of the opposition. He should be careful not to swallow it.
