This was a very curious Autumn Statement. For the last month, we have been told that Britain needed to re-establish the confidence of the markets and put in place renewed fiscal discipline, supposedly so carelessly squandered by Liz Truss. “Eye-wateringly painful decisions” were coming for all of us.
But when the statement came, it wasn’t quite like that. Public spending is protected for 2023 and 2024, with restraint, such as it is, coming only in 2025 and afterwards. Frozen tax thresholds will take time to have an effect.
Meanwhile, the immediate tax increases fall on business, energy companies, dividends, capital gains, and the “rich”, with only the 12p increase in fuel duty – if it survives the storm that is surely coming – likely to be really noticeable to most next spring.
The deficit actually goes up in the current year and doesn’t fall significantly until 2024-5, and the new fiscal rule is weaker than its predecessor.
As a result, public spending will be at its highest since the 1970s and taxation the highest since the Second World War. Both only start to fall, gently, in the late 2020s, and then only because of some pretty heroic assumptions about growth. Indeed, under Liz Truss we were told that 2.5 per cent growth was impossible - yet the Office for Budget Responsibility (OBR) is predicting exactly that for 2025 and 2026.
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How do we explain this?
To do so, I think, we have to go back to that extraordinary week in mid-October, when Truss’s government blew up on the launch pad.
She was levered out of Downing Street with the argument that she had been careless about the public finances, casual about fiscal discipline and had lost market confidence. An emergency correction was needed - tax rises or spending cuts, and probably both.
Yet on taking office, our current government will have found - as the OBR has now acknowledged - that we were already into a deepening recession. Tightening fiscal policy with growth collapsing and interest rates increasing globally would clearly have been an insane policy, one at variance with what virtually every economist would suggest. But, having destroyed the Truss administration for being insufficiently fiscally disciplinarian, the Government could hardly overtly change course itself.
That is why we got what we got. Keep growing spending, raise taxes now on unpopular groups, defer deficit reduction and everything else until 2025, and meanwhile talk a lot about austerity and discipline to disguise the reality that this is likely a similar fiscal policy to what Truss’s would have been, just at higher levels of tax and spend. Then, after the election, if the Conservatives are still in power, it can all be looked at again.
It is right not to tighten fiscal policy into a recession. It is right not to make the immediate problem worse. But if this is achieved by pushing up taxes and not controlling spending, then a price has to be paid in the end.
That price, of course, is that the productive capacity of our economy is slowly crushed. Taxes on business wreck investment and growth. Taxes on the (not very) rich destroy incentives. Britain’s hard-won reputation for being a low tax country is permanently lost. And we all have less of our own money and are less free.
This fiscal statement can, and should, steady the ship. But it will do so because, depressingly, it is an accurate reflection of the current state of the Conservative Party. At least a part of the party seems ready to accept durably higher spending and higher taxes, however un-Conservative that may be. Too many others favour spending discipline and supply side reform in principle, but not in any difficult areas in practice. Not HS2. Not restraining NHS spending and beginning to reform the system instead. Not the triple lock. Not out of work benefits. Not Universal Credit. Not green levies or renewables subsidies. Not planning reform and building more houses. Not fracking. Then, when the inevitable consequential tax increases come, everyone wants them to hit someone else – business, oil companies, the “rich”.
Given all these constraints, it is hard to blame the Prime Minister and the Chancellor for deciding that the way forward in the fiscal statement was the only possible one. They have given the Conservative Party the economic policy it deserves. We like talking tough while avoiding hard choices, so that’s what we have got. We don’t like cutting spending, so it hasn’t fallen. We don’t really want change that upsets anyone, so we don’t try to make it happen.
The problem is that the constituency for the status quo is shrinking. Change is coming. We can deliver it – or we can be swept away by it.
More and more of the young – and not only them – want lower tax rates, to buy a house and have a family, to have an NHS they can use, to be able to save, invest, develop their own skills, and build their own lives. These are the people who should be voting Conservative. I still think the Conservative Party is the best hope for delivering what they want. But it is hard to be surprised that so many don’t.
Conservative Party likes talking tough while avoiding hard choices
Jeremy Hunt’s Autumn Statement will steady the ship, but shows we want change that doesn’t upset anyone