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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Enjoy this “down payment” on the Conservatives’ careful stewardship of the economy. There won’t be many more. There’s still the spring Budget to come, but chancellor Jeremy Hunt’s generosity was that of a man who knows someone else will be facing the consequences.
The politics of this Autumn Statement were achingly simple. Rishi Sunak needs a tale to tell the voters and after a few months of flailing around with implausible narratives — “I am the change” being the most fanciful — he and the chancellor have finally landed on the only one that was ever going to be available. But it remains a story and neither the Tories nor the electorate should assume it has a happy ending.
The major political takeaway is that the Conservative leadership remains seriously tempted by an election next May. This is the obvious explanation for bringing forward the 2p cut in the rate of national insurance to January. Waiting till next spring’s Budget, as would be normal, would not allow people to feel enough of the benefit if Sunak decides to go early. This does not mean a May election is now likely. Party strategists will base that decision on the polls in March — if the gap remains as wide as today it is hard to see the prime minister rushing towards the cannon fire. But this move keeps his options open.
Hunt is a better communicator than Sunak and his statement offered a clear Conservative argument. It runs like this: after years of enormous external shocks (and weeks of Liz Truss), this government has taken the difficult and painful steps needed to get the economy back on track. Having weathered the pandemic (remember the furlough) and the Ukraine war (remember the energy support), the government is turning the corner, conquering inflation, restoring the public finances and is now able to start giving money back. Only the Tories can be trusted with the economy.
It also offers some political clarity. With the welfare reforms to get more of the long-term sick back to work, the national insurance cuts, the increase in the national living wage and the moves to encourage business investment, Hunt offers a traditional Tory message that “work pays” and that prosperity comes from incentivising the private sector rather than the government. Against these, however, he has also clawed back money from capital and infrastructure investment.
Many of the supply-side measures are welcome and Hunt deserves credit for resisting even more blatant election giveaways. He steered a careful course between the competing desires of cementing his reputation through serious long-term reforms and the need to bolster his party’s polling day hopes.
But there is only so much he can do, not least because Labour will not allow Hunt to draw a sharp divide (although the NI cut will put pressure on Rachel Reeves, the shadow chancellor, to find other sources of revenue).
The broader problem for both Hunt and Sunak is that the economics do not align with the politics. Underlying debt will still stand at 92.8 per cent of gross domestic product by 2028-29, hardly levels at which the state of the public finances should support any tax cuts. Growth remains stubbornly low and is predicted to fall against previous forecasts (not that these have proved overly reliable).
Worst of all from the Conservative perspective, real disposable household income per person is projected to be 3.5 per cent lower in 2024-25 than it was before the pandemic. The Office for Budget Responsibility describes this as the “largest reduction in real living standards since . . . records began in the 1950s”. Even with the NI cut, voters will feel poorer and this does not even take account of the decline in key public services like the NHS. In any case the NI cuts are funded by the continued freezing of income tax thresholds, which means personal taxes continue to rise. By 2028-29, an extra 4mn people will be paying income tax and 3mn more will have been pulled into the higher rate.
Nor do the wider politics look happier for the Tories. The latest migration figures come out on Thursday and are predicted to puncture any pleasure felt by party MPs in the wake of Hunt’s statement. This highlights the foolishness of ramping up a political divide on an issue they are failing to address to the satisfaction of those at whom the message is aimed. (Incidentally, growth forecasts would have been even worse if legal migration was lower.)
Had this statement come earlier in the political cycle, there is no way the chancellor would be announcing tax cuts. The toughest spending cuts are all pushed back to after the election. Indeed, faced with tough choices, such as uprating benefits in line with the usual September inflation figure or the more recent lower level, Hunt opted for liberality over retrenchment.
Tory MPs remain deeply troubled by the fact that the tax burden will still reach its highest levels since the second world war. The probability must be that well before next spring, it will be clear that this giveaway will not do the job politically and the pressure will be on to find more tax cuts.
So while the election narrative is set, the image of fiscal rectitude may be hard to maintain. And the grisly truth remains that the underlying story is of tax rises, painful spending cuts or a combination of both after the election, regardless of the outcome.
This then was the electoral equivalent of a man walking into a bar and shouting “the drinks are on her” — or perhaps more honestly, “the drinks are on you”. You’ll soon forget the drink but you’ll remember the hangover.