Doom Loop

UK budgets and fiscal statements are an elaborate game in which governments pretend to be fiscally conservative and the markets pretend this is credible. Liz Truss and Kwasi Kwarteng refused to play the game. They didn’t prepare anyone for the scale of their tax cut plans, nor did they seem at all bothered by the deficits these would lead to. They even declined to ask for a proper set of forecasts. And they got brutally punished, with a market reaction that led to them both losing their jobs.

Jeremy Hunt and Rishi Sunak have played the game perfectly. Never has a pitch been more thoroughly rolled. We’ve had several weeks of headlines promising all sorts of horrible tax rises and spending cuts due to the dire economic outlook. During his statement on Thursday Hunt looked grave, talked a lot about difficult decisions, and generally gave the impression of a kindly doctor informing you of your terminal diagnosis.

By putting on the expected performance he allowed himself to deliver a statement that was in fact not very conservative at all. His new “fiscal rule” (which he barely meets) will mean we still have a deficit in 2027/8 of £70 billion and a debt not far off 100% of GDP. Moreover he’s actually spending more money in the next year – due to the ongoing energy support package and some extra public sector funding. Nearly all of the much anticipated pain comes in 2025-2028. Before the next election there are at least three more big budgetary set-piece speeches to come. The chances of us reaching that point with those numbers staying as they are now, is essentially zero.  It’s the budgetary equivalent of a promise to quit smoking in a few years’ time.

Given the context and the constraints of Tory party politics Hunt did about as well as possible. His ritual dance of pretend fiscal conservatism gave him the space to uplift benefits in line with inflation; raise some key areas of public spending over the next two years; and limit immediate further tax rises to the rich and energy windfalls. What he didn’t do was acknowledge that the government had any responsibility for the grim context – with the standout horror stat being that average disposable income will fall by 7% over this year and next. Which is by far the biggest post-war drop. This was all blamed on global factors, mainly the war in Ukraine. Of course the war, and covid, have played a major role but the difficulties have been exacerbated by government policy. Austerity, Brexit, and the recent Truss fiasco were a toxic brew. Contrition would not, perhaps, have helped Hunt politically but the absence of it was grating nonetheless. At points it felt like being told to calm down by someone who’s just totalled your car.