This time last year Jeremy Hunt was setting out a brutal fiscal retrenchment as the Conservatives sought to claw back credibility following Liz Truss’s disastrous “mini” Budget.
On Wednesday Britain’s chancellor will attempt to present a more optimistic vision, as Tory MPs call for tax cuts ahead of a likely election next year.
But while Hunt is now expected to have some extra fiscal wriggle room, the fundamental reality of the UK’s straitened public finances has not changed, which means there will be tough choices ahead for whoever wins the next election.
Here are five things to watch when Hunt stands up to deliver his address.
1. A gloomy growth outlook
Hunt’s statement will be dominated by measures aimed at bolstering the UK’s torpid growth performance, as he seeks to induce businesses to invest more while stripping away barriers to big projects, such as energy infrastructure.
But the measures he announces are unlikely to forestall some unflattering growth forecasts from the Office for Budget Responsibility, the fiscal watchdog. While GDP growth is likely to be upgraded this year, the picture is less optimistic thereafter. In March the OBR said the UK economy would expand by 1.8 per cent in 2024 and 2.5 per cent in 2025. The Bank of England, by contrast, has predicted near-zero growth for both years.
The OBR’s 1.7 per cent estimate of the UK’s sustainable growth rate, which is how fast the economy can grow without driving excess inflation, is also more optimistic than those of other forecasters. One of Hunt’s goals will be to convince the OBR to give him some economic credit for pro-business policies in its forecasts.
The inflation outlook is also looking worse than in March. The OBR has estimated that inflation will plunge next year to just 0.9 per cent, before running at just 0.1 per cent in 2025. The BoE, on the other hand, does not think CPI inflation will fall below its 2 per cent target until the final months of 2025.
2. Mixed fiscal prospects
In September Hunt warned that it would be “virtually impossible” to cut taxes in the Autumn Statement given fiscal problems, such as an expected surge of more than £20bn in government interest payments this year.
The mood has since shifted, with Prime Minister Rishi Sunak on Monday declaring that he wants to “begin the next phase and turn our attention to cutting tax”. His ability to contemplate tax reductions reflects in part an increase in the expected “headroom” the chancellor has for his key fiscal rule of reducing the UK’s debt-to-GDP ratio between years four and five on the government’s forecasting horizon.
This headroom had been perilously thin in the March budget, with the OBR estimating it at just £6.5bn — well below the average £25bn of headroom chancellors have enjoyed since the watchdog was established in 2010. But public borrowing is now running £16.9bn beneath OBR forecasts in the current fiscal year, and some forecasters have become more upbeat about the chancellor’s fiscal room to manoeuvre.
This improved outlook is being driven in part by higher inflation and wages, which are bolstering tax receipts. The UK economy in the three months to September was about 7 per cent larger in nominal terms than forecast by the OBR in March.
Allan Monks, of JPMorgan, estimates the fiscal headroom could increase by 0.5 per cent to 1 per cent of GDP, or about £20bn more than the OBR’s March forecast of £6.5bn — which would enable fiscal easing of around £5bn-£10bn — while Citi estimates it will be £24bn and Goldman Sachs puts it at £25bn.
3. A path to tax cuts
After weeks of speculation Sunak on Monday confirmed that he would indeed cut taxes now that his pledge to halve inflation has been met.
The government insists its focus is on enhancing the country’s growth prospects via higher investment so it would be no surprise if Hunt extends his flagship “full expensing” tax break — a £9bn a year measure that allows companies to deduct the full cost of an investment in equipment from their pre-tax profits.
But Tory MPs are hoping for more as they struggle to whittle away at Labour’s 20-point opinion poll lead. Earlier discussion of a cut to inheritance tax — a levy that is deeply unpopular among Conservative voters — has given way to a focus on other personal taxes, particularly income tax and national insurance.
The prime minister has, for example, previously said he wants to cut the basic 20p rate of income tax. A 1p reduction in the basic rate would cost about £6bn. But the government will need to tread carefully if it is to avoid policies that undermine progress towards the BoE’s 2 per cent inflation target.
Sunak on Monday suggested he would move carefully, saying he would reduce taxes “over time”.
4. Benefits uprating
Hunt has repeatedly refused to confirm whether he will follow standard practice and uprate working age benefits next April by raising them in line with September’s inflation rate of 6.7 per cent.
An attempt to cut the benefits bill by instead using October’s inflation rate, of 4.6 per cent, could cut spending by as much as £3bn in 2024-25, the Institute for Fiscal Studies think-tank estimates, at the expense of 8mn households.
However, it could prove difficult to short-change recipients of disability benefits, who are better protected by legislation. A measure that did not apply to them would save only £1.3bn, according to the Resolution Foundation think-tank.
Hunt is also under pressure from charities and local authorities to end a freeze on housing benefits that has made it virtually impossible for benefits recipients in certain areas to find any affordable rental property and councils footing the bill for people forced into temporary accommodation by homelessness.
The debate over uprating comes against a backdrop of a broader clampdown on benefits claimants who Hunt describes as “choosing to coast on the hard work of taxpayers”. He plans to reintroduce “workfare” measures that would strip benefits from claimants in long-term unemployment who refuse to take a mandatory job placement.
He will also set tougher criteria for incapacity benefits, likely to mean that some people with long-term physical and mental health conditions will receive less financial support and be expected to look for work.
5. A crunch in public spending
Hunt has vowed to boost efficiency in government departments. One leg of this is a drive for higher public sector productivity, with the Treasury claiming that new technology and cuts to administrative workloads can save millions of working hours, including 750,000 policing hours per week.
But productivity wins in the public sector will not happen overnight — if they happen at all — and they will not overshadow the wider pressures of brutal spending settlements on government departments.
According to the Resolution Foundation, departments that are not prioritised under government spending plans face a 16 per cent real-terms drop in per-capita spending between the most recent fiscal year and 2027-28, driven by higher inflation. Real-terms cuts of this scale are “implausibly big”, the think-tank argues.
Nevertheless, Sunak and Hunt may decide that it can leave this conundrum in the arms of the next government. In other words, they may opt to bank the dividends of higher inflation when it comes to tax receipts, while leaving the damage it does to public services to be confronted another day.