Jeremy Hunt is a lucky politician. The failure of his predecessor made him chancellor of the exchequer. That and the energy crisis forced him to take tough action last November. Since then, falling gas prices have relieved pressure on the economy and public finances. But he has also used his new room for manoeuvre shrewdly. The Budget contains sensible ideas. It is not transformative. But the pairing of Rishi Sunak and Hunt is competent. That is a nice change.
The summary by the Office for Budget Responsibility of where the UK economy is and what the chancellor has done is straightforward. The near-term economic downturn is set to be shorter and shallower, medium-term output is set to be higher and the fiscal deficit and net public debt are set to be lower than expected four months ago. A big part of the explanation is that wholesale gas prices have more than halved in the past six months and are expected to fall further, strengthening gross domestic product and lowering inflation. (See charts.)
Yet it is essential not to be carried away. Structural weaknesses persist. Notably, business investment has stagnated since 2016, as a result of Brexit uncertainty, the pandemic, the energy crisis and jumps in the post-tax cost of capital. Labour market participation has fallen dramatically since the start of the pandemic. As a result, the labour force is 520,000 people smaller than expected before the pandemic. Above all, productivity has grown at less than half its rate prior to the 2007-09 financial crisis. One should add to these longer-term woes that the cost of living crisis remains severe, core public services are performing poorly and attempts to cut the real earnings of public sector workers in response to unexpected inflation are creating an inevitable (and deserved) backlash.
According to the OBR, the chancellor has spent two-thirds of his fiscal windfall on his Budget measures. These offer more support with energy bills and business investment in the near term, while boosting labour supply in the medium term. His measures will, argues the chancellor, also lower inflation by nearly 0.75 percentage points this year.
Despite this largesse and the better economic outlook, real household disposable incomes per person are expected to fall by a cumulative 5.7 per cent between 2022-23 and 2023-24. This decline is 1.4 percentage points smaller than forecast in November 2022, but it is still the largest two-year decline since 1956-57. Real living standards are forecast to be 0.4 per cent lower in 2027-28 than before the pandemic. That is almost a lost decade and comes on top of a very poor previous decade.
For what it is worth (not much, given the laughable history of broken and then abandoned fiscal rules), the chancellor is forecast to hit the target of a falling ratio of net public debt to GDP (excluding the Bank of England) by a margin of £6.5bn (a mere 0.2 per cent of GDP) in 2027-28. That is the smallest headroom any chancellor has set aside against his primary fiscal target. Given the risks of higher interest rates and a worse economy, this is a gamble. Does it matter? Maybe not. It is hard to predict when or if markets will turn against a country.
This decision to use his new margin of manoeuvre to the limit must make sense politically: for his party, the future is near. Whether it makes sense economically and socially depends on the wisdom of the measures themselves.
The most expensive measure is 100 per cent allowances for capital spending, at an average cost of about £9bn a year for three years. The measure itself is desirable. But it does need to be permanent. It is forecast to disappear because it would otherwise break the chancellor’s rules. This is plainly silly. If it is important (it is), Hunt should propose long-term ways of financing it. This is yet another example of the failure to address spending and taxation together, in a systematic way, which is evident in the refusal to recognise the costs of meeting commitments.
The second big set of measures are ones directed at increasing labour market participation, the most important of which is greater support for childcare. This must be regarded as a permanent addition to the welfare state. So, too, are the new disability and welfare measures, more generous pension tax allowances and higher spending on defence. These will add up to £8.3bn of additional spending in 2025-26.
In themselves, these measures are mostly welcome. The OBR believes, for example, that the measures will raise employment by 110,000. Higher employment is good in itself and will also raise GDP. Higher defence spending seems almost inevitable nowadays at a time of war. But the liberalised treatment of pensions is arguably excessive and benefits only the well off.
There are many other notable features of the Budget: plans for 12 new investment zones; a transfer of responsibility for local economic development to local authorities; a boost to mayors’ financial autonomy; a decision to class nuclear energy as “environmentally sustainable”; state finance of the Sizewell C nuclear generation project; boosting innovation by making regulation of new medicines quicker; and encouraging artificial intelligence.
In all, the chancellor is riding his luck. He has produced a set of measures that should bring about some structural improvements. But the fundamental picture remains one of a cost of living crisis, a dysfunctional public sector, an unhappy public sector workforce and a less than dynamic economy. Will this Budget change all this? I doubt it. Will it win the next election? I doubt that, too.
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