Sorry, Mr Hunt, I can’t raise a glass (of relatively cheap) beer to your tax cuts

Jeremy Hunt’s autumn statement had plenty to cheer up Tory backbenchers. But for the rest of us, there was that sinking feeling that the bad times are far from over, writes Sean O’Grady

(PA)

Forget the cut to National Insurance, cheap beer, business investment tax breaks and changes to the planning system – which are all very welcome and headline-grabbing and just what the Tory backbenchers demanded from the last autumn statement before an election. They are a misleading signal about the underlying economic health of the nation and its living standards.

The chancellor had a notional “windfall” of £27bn – and too much of that was spent on tax cuts for households. Given the state of the national infrastructure and still-weak post-Brexit private capital spending, much more should have been devoted to investment. That is because that is the only way to get the economy to growth – an urgent task once again postponed.

The most significant thing to emerge from what the chancellor and the independent Office for Budget Responsibility had to say was about how the economy as a whole will fare in 2024. It’s going to be dismal, even worse than we thought. After the end of the pandemic, the country enjoyed a bounce-back. Revisions to the way gross domestic product is calculated also gave things a boost.

But in 2023, there has been negligible expansion, at 0.6 per cent, and things won’t be much better, if at all, in 2024 – a measly 0.7 per cent. Average annual growth over the next few years, say the OBR, will be 1.5 per cent. That’s around a half of what we used to take for granted.

Some forecasters believe that the UK economy will stagnate for many years to come. That, as they say, is this the big picture.

Such sluggish growth actually means that although the overall tax burden will dip a little in the next year or two, taxes will still rise to 38 per cent of the national income by 2028. Overall, the Tories have raised an extra £100bn in tax since 2019. Much of this has been achieved by freezing tax thresholds. In effect, the country is trying to pay off the vast debts run up – rightly – by the furlough scheme and other measures to keep the economy alive during the Covid pandemic.

It’s as if we took out a huge mortgage in 2020-21, and now the interest rate on the debt has gone up by more than we thought. Hence the squeeze – and the tiny room for manoeuvre.

Such a background will constrain whichever party finds itself in power for the rest of the 2020s, and, cynically, this next one might be one of those rare general elections that a governing party is better off losing. There simply will not be the resources to support much improvement, either in private consumption or public services.

Living standards will improve… but at a glacial rate. There will be friction between groups looking to defend their livelihoods – strikes and political pressures, just as we’ve seen in recent years. Tough choices will have to be made. The governance of the UK for the next few years is something of a poisoned chalice.

In any case, such a backdrop makes it hard for Rishi Sunak and Jeremy Hunt to declare that the country has turned a corner, and with it the prospects of the government being able to stage an political recovery and claim it has delivered on another of Sunak’s priorities: to grow the economy.

The brighter news is confirmation that Sunak’s personal target of halving inflation to below 5 per cent has already been met – but that still means it is way above the actual official target of 2 per cent. The cost-of-living crisis is far from over, even if it’s moderating, and households will know that a 2 percentage point-reduction in their national insurance burden nowhere near makes up for frozen tax thresholds, past inflation and hikes in energy bills, council tax and other overheads.

The rise in the minimum wage, to £11.44 an hour, is certainly good news for those on lower wages. But for some businesses, it may start to be a challenge to absorb that cost and not pass on the additional cost on higher prices. The “feel-good” factor traditionally needed for a general election win remains elusive. Relying on the electorate’s fear of Labour being even worse isn’t as potent a weapon as has been in most of the past decade.

Things just don’t feel like Britain is booming. Buried away in the OBR document is a forecast 4.7 per cent fall in house prices in 2024. The energy price cap may even go up as soon as tomorrow.

The governor of the Bank of England, Andrew Bailey, hasn’t helped the mood with a warning that inflation may well prove stubborn in the coming months, so that halving the rate second time round will prove much more arduous than getting it down from double figures (which it was always going to do, barring a second energy crisis). That implies that, despite some easing in the rates on deals from the big lenders, interest rates won’t start coming down until later next year – and even then, not by very much. The balance of probabilities is that they’ve peaked, but they won’t in any case return to the ultra-low levels experienced after 2008.

So, how come the public finances are doing so well, and the chancellor has been able to cut taxes? The short answer is because he has raked in so much in extra revenues, especially from income tax and national insurance. This is because inflation and wages went up so much in the past couple of years. The freezing of tax thresholds since 2021 has been a highly lucrative tax for the chancellor, and a sneaky one too, because the public tend not to notice it – though awareness of so-called fiscal drag is growing.

Be in no doubt: the Treasury has taken much more out of people’s pockets than it is now handing back. Please note, too, that the freeze on thresholds is scheduled to last until 2028 – meaning that more and more middle earners will be dragged into the higher tax brackets: That’s probably not politically sustainable.

In tandem with a growing understanding of fiscal drag comes widespread suspicion about a government promising tax cuts shortly before a general election. Such fears would be well-founded: the chancellor aims to get the national debt and the annual deficit down in the coming years – and his room for manoeuvre is really quite tiny.

The £15bn or so cut in taxes announced in the Autumn Statement should be seen in the context of a total tax take of roughly £800bn, at a time when public spending is running at £1,000bn, or £1 trillion. It doesn’t take much to go awry with either of these very large numbers for even nugatory tax-cutting measures to suddenly look unaffordable.

If they had to be reversed in some way, there would either be cuts to public spending or compensatory tax rises – and the electorate would be unsparing in its verdict.