No news from the markets was the best news out of the Autumn statement yesterday. 10 year gilts rose by 5 basis points, and the pound barely fell, mostly reflecting both the dollar’s strength and the fact that the UK is now in recession.
All the actual news is pretty dire. Living standards are set to fall by 7.1%. The tax burden is set to rise by 4.1% between 2019 and 2028, the highest since the Second World War. Business investment will be nearly 10% lower in 2027 than previously forecast. 8.5% of public spending by 2027-2028 will go to servicing the debt, again the highest since the 1940s. They may only be forecasts, but they are still grim reading.
In that context, the Government’s strategy had an eye to three overriding concerns – the first to support the economy, the second to stabilise the finances, and the third to try and deliver on the Government’s manifesto. In difficult circumstances, this statement broadly managed to do all three. What it failed to do with any conviction was lay out a roadmap for growth in the future, or to do more than offer hope for public sector reform.
In terms of supporting the economy, this is not an austerity budget, and recognises the ineluctable fact that the country is facing an external shock. A war between two major commodity exporters that happen to produce grain, vegetables, natural gas and oil was bound to produce a major living standards shock around the world. Rising energy prices have acted as a significant cost of businesses and households – input prices for producers have risen 19.2% this year. As such, the Government was going to have to fiscally expand in the short term, which it has done. Since March, Government borrowing this year has increased by £64.2 billion, and next year it will increase by £39.8 billion relative to the OBR forecast earlier this year. Estimates suggest that the Government’s actions will have reduced the impact of the recession by about a point of GDP.
Secondly, despite this significant spending, the Government had to prove it possessed a credible plan to stabilise public finances and restore its credibility. In the short term, this means tax rises, and in the long-term public spending will be constrained to 1% a year. Many of the taxes were designed to avoid negative impacts on growth. Policy Exchange has called for a windfall tax, and this was included in the budget, for example. These measures were necessary because of both rapidly rising interest rates, and overall global volatility in global markets. As we saw in the mini-budget, bond markets are skittish, and so it is extremely difficult to do anything perceived as fiscally radical. The Chancellor’s repeated references to the Bank of England and the OBR were designed specifically to inoculate the Government from this charge. The market reaction suggests this largely worked.
Finally, the Government was trying to deliver its manifesto commitments. More spending on public services – particularly the NHS and Education – keeping the pensions triple lock, continuing the devolution deals, and maintaining capital spending over this Spending Review period, these were all measures that basically continued the approach laid out in 2019. Some manifesto commitments have been dropped, such as 0.7% spending on development, no income tax rises, and the current assessments are reliant on relatively higher levels of immigration. This is in effect a commitment to the 2019 manifesto commitments on public spending and services but financed through tax rises and a more constrained fiscal stance.
On balance the Government succeeded in its main aims. It prioritised promises from the 2019 manifesto, it laid out a plan that the markets found credible, and it responded to the immediate shock. In the short-term the budget was appropriate but the lack of a long-term vision was marked.
Positive noises were made on growth, efficiency and on supply side reform, but they were de-emphasised. Planning reform, one of the most pressing drags on the economy, was only mentioned once. The new state pension will be worth 25.8% of average full time weekly earnings next year, the highest in over 40 years. Policy Exchange recommended that pensions be linked to a specific percentage of annual earnings, and it is unfortunate that Government has not taken this approach. Throughout the statement, there was a distinct sense that not only was the Government trying to balance its various policy objectives, but also trying to balance the disparate elements of a governing majority pushing in different directions. This can have distinctly negative results for growth.
For example, despite consistently weak business investment forecasts in the OBR, the Government is still raising corporate taxes to help finance increased spending. The Government showed a lack of ambition on R&D tax credits for small and medium sized businesses: it made them less generous but did not reform the many problems that make the credit prone to funny accounting. Similarly, Policy Exchange’s Senior Fellow Gerard Lyons has noted repeatedly that investment incentives have been steadily reduced over the last 10 years as corporate tax headline rates have gone down. Now they are set to go up with few offsetting changes. This was by far my biggest disappointment in the statement this week: raising taxes on businesses to finance greater spending. Necessary in the short-term perhaps, but surely something the Government should signal an end to as soon as feasible.
One bright spot on the supply side agenda was the Government’s response to the Solvency II consultation. Policy Exchange argued in Unleashing Capital that the Fundamental Spread did not need to be changed and that the Matching Adjustment needed to have expanded eligibility. It is heartening to see that the Government has put its foot down with the regulators and will legislate if necessary. This glimmer of ambition needs to become the norm. The Government has also committed to fighting fraud in the benefit system, something Policy Exchange called for in its research piece Balancing the Books.
If anything, what the last three months have shown us is that growth reforms are extremely hard to deliver in practice. While the Truss approach clearly failed, it will also require something more concerted than what was unveiled in the Autumn Statement. The back-loading of public spending cuts reminds me slightly of Augustine’s prayer: “Lord make me chaste, but not yet”. The budget succeeded in its main aims, but neither we, nor the Government, should mistake it for an ambitious long-term vision for growth.