There is an old rule of thumb that says Budgets well received on the day, very quickly unravel. Judging by the next morning’s very critical headlines, that should make Chancellor Jeremy Hunt’s Autumn Statement a runaway success. Times are far from normal though. Over the past three months, Britain has had three prime ministers and four Chancellors. Over the past two months, Britain has had two major ‘Fiscal Events’, Budgets in all but name, which have veered as wildly in political ideology as they have in economic reality.
In September, Kwasi Kwarteng announced a huge, unfunded, £30 billions of tax cuts (including ditching the 45p bracket for the highest earners). His immediate successor has not only reversed these measures but also decided to raise taxes by some £55 billion (including reducing the level at which earners start paying that 45p rate).
Missing from Kwarteng’s ‘Mini Budget’ was, of course, the Office of Budget Responsibility (OBR) forecast. These numbers were ominously present alongside Hunt’s announcements and may well prove to be the most significant indication of the economic environment over the coming months and indeed years. They confirm the significant recession ahead and, perhaps more sobering, the warning that Britons are going to experience one of the sharpest falls in living standards in comparable history. Our economy is set to shrink by around 2% while our living standards are expected to fall by 7% — that wipes out the last eight years of growth.
The OBR report highlights that spending on debt interest has spiked, just as borrowing rises and this is combined with raging inflation and mounting debt held by the Bank of England. This is all costing the British economy dearly. To compound the country’s problems, the OBR assumes that Brexit has lowered the UK’s trade intensity by some 15% (though you will find no mention of that in Hunt’s statement).
So, there is a shrinking economy combined with raging inflation, an energy crisis and tax rises which are all hitting the disposable income of households. Looking around, the OBR report and Autumn Statement confirm what is becoming blindingly apparent. The signs of economic downturn are already there to see: profits warnings, retail insolvencies, slump in building and even layoffs in the tech sector. Business as well as consumers need to prepare themselves for a bleak period ahead.
But while economic forecasts are made in the aggregate, experiences will not be the same. There will be sectors which do better than others and businesses within troubled sectors (such as retail) which are able to take advantage of the turbulence that destroys their competitors. And the downturn into recovery will not be uniform across the country. There will be regions, including London and the South East, which experience a shorter lived contraction than others. To his credit, Jeremy Hunt avoided cutting capital spending which might have proved an easier political choice but would have compounded downturn especially in the North.
Hunt delivered something of a responsible ‘Budget’, certainly by comparison to his predecessor and in a short period has brought a degree of stability to a chaotic situation caused by his own governing party. It was short on political theatrics or populist rabbits pulled from the hat. But these are not the sort of measures that a government wants to deliver at this stage in the political cycle. Hunt will never be a popular Chancellor, derided by those on the right of his own party and the press as well as political opponents. And his message is clear: things will get worse before they get better.