Fifteen years after the great financial crisis blew Britain’s economic settlement apart, we’re still scrabbling around for a replacement. The staggering scale of our problems was revealed yesterday in Jeremy Hunt’s thoroughly depressing budget statement. Despite heavy doses of magical thinking to make his sums add up, the grim reality of the budget, buried in the small print, is that we are getting poorer and more vulnerable. Even the smallest fluctuations in the international economic climate could have ruinous consequences.
To grasp the scale of our national fragility, you have only to cast your eye across the Office for Budget Responsibility’s report. The basic reality, there in black and white, is as confounding as it is worrying: we are now set to continue to get poorer even as the economy gets bigger, while rising taxes will not fund more spending on public services.
At first glance this doesn’t make sense, but the reasons are simple. The economy will only get bigger because there will be a lot more people in it, rather than because we, as individuals, are getting richer. The OBR’s forecast for the overall size of the economy remained virtually unchanged from last time. Yet it revised down its expectations of GDP per person. In fact, from 2022 we have been getting poorer — a situation which will only start to change from the second half of this year.
But perhaps the most crucial line of all was this: “Economic and market conditions mean the Government needs to run a primary surplus… of around 1.3% of GDP just to stabilise debt in the medium term.” By comparison, the OBR went on, in the 2010s, “debt could be stabilised while running a primary deficit of 2.1%”. In other words, we now get less for more, literally.
To illustrate the point, take these figures: taxes as a share of GDP will rise to 37.1% in 2028-29, four points up on what they were before the pandemic. But spending will fall “steadily” as a share of GDP from 44.5% this year to 42.5% in 2028-29. All the while, national debt will rise. Put bluntly, the size of our debt — and the scale of the interest we are paying on it — means we are now much poorer than we used to be. And this is before we consider the economic burden caused by our ageing population and the crisis in Ukraine leeching more money for defence.
And so, facing this reality, even though we are just a matter of months away from the next election, Hunt had barely any room for manoeuvre. The 2p cut from national insurance and the increase in the threshold at which child benefit is removed eased the tax burden on middle-class workers, the voters the Conservative Party will need if it is to stand any chance of avoiding a wipeout whenever the election is called. But even these tweaks around the edges of the tax system required such fanciful assumptions as to be essentially worthless as a meaningful forecast.
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