Chancellor Jeremy Hunt’s Autumn Statement is expected to contain a gloomy mixture of tax hikes and spending cuts. We will be told this is absolutely necessary to plug the fiscal hole left by the Truss government.
The latest estimate is that the government is looking for up to £60bn a year by 2027-28. Last weekend the Observer reported the “cost” of “Liz Truss’s disastrous mini-budget” is responsible for half that amount, at £30bn. This may appeal to their anti-Tory readers but it is a highly disingenuous claim.
To start it is worth noting that the “fiscal hole” does not represent the current budgetary deficit or public debt level. Instead, it is the gap between the projected public finances and the chancellor’s goal – in this case, debt falling as a share of GDP within five years. The figure is dependent on the uncertain, and often inaccurate, growth and revenue model from the Office for Budget Responsibility (OBR).
The single biggest driver of the expected hole is the gloomier-than-expected economic situation driven by spiralling inflation and energy costs. The OBR, in their last forecast in March, thought that economic growth would be 1.8 per cent next year, while more recent forecasts have the economy contracting by up to 0.6 per cent. A smaller economy means tens of billions of pounds less tax revenue.
The UK’s lacklustre growth cannot be blamed on Truss – whose supply-side reform policies had the explicit goal of reversing the UK’s woeful trajectory. In fact, Hunt’s decision to maintain the corporate tax hike is a key reason for less growth, at least according to analysts at Goldman Sachs.
The other reason for the hole is that the government is facing higher-than-expected outlays. Some of this is effectively automatic – like welfare payments increasing as people lose their jobs during a recession. There are also Hunt’s expected costly policy decisions, such as increasing pensions and welfare payments in line with inflation, that is running much higher than the OBR forecast in March (having reached 11 per cent versus the forecast 7 per cent). Again, none of this can be blamed on Truss.
There are only two plausible ways that the mini-budget can be blamed for the fiscal hole. The first is the cancellation of the national insurance hike and stamp duty cut. This will have a budgetary impact and will ultimately need to be funded. But it is also widely supported across Parliament, including by Labour, and the public. It is hardly a “disastrous” policy to not put up taxes on workers.
The other “cost” of Truss is, we have been told, higher interest payments on government borrowing. In the immediate aftermath of the mini-budget and the fire sale dynamic in pension funds yields jumped. But, after most of the measures were reversed, gilt yields have now fallen back to similar levels as before the mini-budget at around 3.5 per cent. This is higher than the OBR forecast in March (at around 1.5 per cent) but that has nothing to do with the mini-budget. It reflects higher inflation and interest rates across the US, Eurozone and UK.
It may be tempting to blame Truss’ premiership for our current predicament. But this distracts from the need to address the much deeper structural issues. Whether rushing to put up taxes and cut spending is the right answer, however, is much less clear.