Jeremy Hunt is a Chancellor with lots of choices, but few options. As he prepares for Thursday’s statement, a Budget in all but name, he is hemmed in by political and economic realities that have been taking shape for a decade.
If Hunt fails to address these, he knows what will happen. The fate of his immediate predecessor still looms large; it’s not even two months since Kwasi Kwarteng made his September statement, a moment that will go down as one of the biggest political calamities in history. The fallout showed clearly that the country’s creditors will not support unbalanced books — and this makes Hunt’s job infinitely trickier.
For all the failings of Truss and Kwarteng’s short reign, their fundamental diagnosis was right: the British economy had been too lethargic for too long. It is an inescapable fact that GDP and real-term wage growth have never recovered their pre-Financial Crisis trajectory. Both as a nation and as individuals, we are much poorer than we could have been, especially compared to some of our European neighbours. Without borrowing, this creates a particular crunch around public spending.
In simple terms, as the economy grows, more money becomes available for public services even if the proportion of tax remains the same. As Liz Truss delighted in putting it, if you increase the size of the pie, the slices get bigger. The problem for Britain is that we have failed to do this, meaning that even to keep services at the same level requires a greater proportion of spending, which must come either from borrowing or taxation.
But with the price of borrowing increasing and the markets averse to unfunded promises, the government is unwilling to commit to more debt-led spending. Hunt, then, faces a stark choice: between protecting services by raising taxes and protecting households by cutting spending. Hunt is likely to chart a course through the middle of both, with a sober budget that both increases personal taxation and reduces public spending. Neither of these is likely to be popular.
It is unclear where any new austerity will come from. “Efficiency savings” have largely failed to materialise and an air of dereliction now hangs about the public realm: NHS appointments are oversubscribed, the police overstretched, and councils cutting back, while staff are demoralised and likely to turn militant if faced with further pay attrition. This has an economic effect but is also a political problem for the Chancellor.
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