The bowler hats are back - a return to orthodoxy!
Déjà vu - 2010 all over again?
Kwasi Kwarteng and Liz Truss are gone - like kids with a sugar rush they became quickly energised, but crashed just as rapidly along with their policy platform.
There was consensus on Truss’s diagnosis (we have suffered lacklustre growth since the financial crash) but the markets made clear the prescription was wrong. It is clear from the chancellor’s Autumn Statement today that the men in bowler hats are back in charge of the public finances. Rishi Sunak, whose only significant political experience prior to becoming PM, was at the helm of the Treasury, is a proud and a self declared ‘fiscal conservative’ as is the chancellor who had to be from the minute he stepped into the Treasury to calm worried guilt markets.
In 2010, the attempt to balance the books the split between spending restraint and tax rises fell roughly 70/30 in favour of spending cuts. Today however, we find around £30bn coming from tax rises (largely in the form of ‘stealth taxes’ by freezing the thresholds of tax bands) and £30bn from spending. Although spending is actually set to rise in the next financial year and the bulk of the measures taking hold after the next general election. In contrast to 2010 there are also few ‘easy tricks’ left to pull - like swapping from the Retail Prices Index (RPI) of inflation to the Consumer Prices Index (CPI) as the measure for increasing benefits - as many of these have already been done.
Despite the headlines, total departmental spending will actually grow in real terms at 3.7% a year on average over the current Spending Review period with the NHS getting an extra £3.3bn in 23/24 and again in 24/25 and the schools budget getting a £2.3bn boost in 23/24 and another £2.3 bn extra in 24/25.
Hunt and Sunak tried to park some tanks on Labour’s lawn with two former key players from New Labour making a re-appearance. Michael Barber (Blair’s Delivery Unit Chief) is undertaking a review of skills policy and for Labour Cabinet Minister Patricia Hewitt is undertaking a review integrated care boards.
Global or domestic factors, how did we arrive here?
2022 has been a turbulent year for the global economy, let alone that of the UK. With already mounting worries about global inflation rates (which the Office for Budget Responsiblity puts down largely to global factors), the war in Ukraine skyrocketed commodity prices, with wholesale gas and electricity prices pushed to 4-8 times their pre-pandemic averages, plunging Europe into an energy crisis. Investors were already jittery about the state of government finances across the developed world, pushing yields (i.e. borrowing costs) up from August.
Prior to Kwasi Kwarteng’s budget, the UK was running a deficit at 7.2% of GDP - one of the highest in the G20, as well as a record breaking trade deficit. Markets responded with a fire sale of bonds, leading yields to skyrocket, doubling real interest rates on government debt, as well as smashing down bond prices, leading to a collapse of the balance sheets of UK pension funds, requiring swift intervention from the Bank of England.
Ah! Look out for the “black holes”!
The gravity of a black hole is so strong that it bends and warps the very fabric of space itself. In a similar way, the spending and tax commitments set out today are so radically different from the short-lived Truss era that they will drag the political debate - and any Labour plans for a positive narrative over the next two years - back towards harsh economic realism and tough choices.
Like the Starship Enterprise, Labour will come to find themselves in many hostile situations if they challenge the Government’s spending commitments. It will force them on the defensive and stifle their ability to articulate a positive policy platform. The announcements today mirror the type of ‘eye watering’ tight fiscal measures taken by then chancellor Ken Clarke in 1996, which he later admitted were measures he would never have stuck with had the Conservatives won the election in 1997. Gordon Brown, driven by fear of what the markets would do, stuck to those commitments for two years, then unleashed the Private Finance Initiative (PFI) as a means of funding Labour’s huge public spending commitments in schools and hospitals - essentially shifting borrowing off the Government’s ledger but adding to longer terms costs.
With such a rapidly shifting economic landscape, it’s hard for Labour to commit to costed policies. Indeed Labour sources have inferred that commitments they made six months ago are ostensibly obsolete. In her response, Rachel Reeves committed to abolishing non-dom tax status which would (according to Labour) raise £3bn, target tax measures on private equity managers who pay low tax as a proportion of their income and increase the scope of the windfall tax the chancellor announced by closing the ‘loopholes’ in it.
However, the devil is in the detail, and the Red Book which accompanies the budget deserves scrutiny in the coming days and weeks. Today need not be a tablet of stone for Labour, like 1997 was for Brown. Hunt was smart with the windfall tax pledge labour advocated. There will be more: budget statements, financial statements, OBR reports before the next election. Labour need to hold their nerve, exercise restraint, stick with the public finance commitments outlined for the next two years and continue to evaluate their options. They will go hard on the Government about the UK’s anaemic growth over the past 12 years but they need to articulate that there are different choices to be made in growing the economy and craft a vision for the future of public services and the economy that distinguishes themselves from the government.
However unlikely, the Conservatives hope that the public will realise that many of the issues the UK faces are global in nature and somewhat outside of the Government’s control. That the tough choices they are making are forced upon and that they have tried to swing the axe as fairly and compassionately as possible. But for now, with Labour still 20 points ahead in the polls it seems a significant uphill battle.
