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Put the pie down (Peter Summers/Getty Images)
Jeremy Hunt is a Chancellor with lots of choices, but few options. As he prepares for Thursday’s statement, a Budget in all but name, he is hemmed in by political and economic realities that have been taking shape for a decade.
If Hunt fails to address these, he knows what will happen. The fate of his immediate predecessor still looms large; it’s not even two months since Kwasi Kwarteng made his September statement, a moment that will go down as one of the biggest political calamities in history. The fallout showed clearly that the country’s creditors will not support unbalanced books — and this makes Hunt’s job infinitely trickier.
For all the failings of Truss and Kwarteng’s short reign, their fundamental diagnosis was right: the British economy had been too lethargic for too long. It is an inescapable fact that GDP and real-term wage growth have never recovered their pre-Financial Crisis trajectory. Both as a nation and as individuals, we are much poorer than we could have been, especially compared to some of our European neighbours. Without borrowing, this creates a particular crunch around public spending.
In simple terms, as the economy grows, more money becomes available for public services even if the proportion of tax remains the same. As Liz Truss delighted in putting it, if you increase the size of the pie, the slices get bigger. The problem for Britain is that we have failed to do this, meaning that even to keep services at the same level requires a greater proportion of spending, which must come either from borrowing or taxation.
But with the price of borrowing increasing and the markets averse to unfunded promises, the government is unwilling to commit to more debt-led spending. Hunt, then, faces a stark choice: between protecting services by raising taxes and protecting households by cutting spending. Hunt is likely to chart a course through the middle of both, with a sober budget that both increases personal taxation and reduces public spending. Neither of these is likely to be popular.
It is unclear where any new austerity will come from. “Efficiency savings” have largely failed to materialise and an air of dereliction now hangs about the public realm: NHS appointments are oversubscribed, the police overstretched, and councils cutting back, while staff are demoralised and likely to turn militant if faced with further pay attrition. This has an economic effect but is also a political problem for the Chancellor.
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SubscribeWhat baffles me is the speed of the deterioration of the economic forecasts we’ve been presented with. When Sunak left the Treasury in July, the last forecast he was presented with was for a 30 billion surplus over the next 5 years. He returns only months later as Prime Minister, to a 60 billion blackhole to fill. So what changed in the intervening months? Very little on the face of it. Inflation and the sanctions on Russia were already accounted for. The mini budget didn’t cause it, it was never actually implemented, with borrowing costs and the pound returning to their starting points once it had been abandoned.
I increasingly believe that Philip Pilkington‘s and Thomas Fazi’s assessments are correct. Sanctions on Russia are far more detrimental to western economies than any of our politicians or economists had predicted or are now willing to admit. As painful as it is politically, unless someone is willing to address the elephant in the room, that the European economy is simple not viable whilst the conflict persists, austerity and economic decline may be an inevitability for the foreseeable future, whoever is in charge.
There’s also the possibility that the world can never return to anything approaching pre-Ukraine normality. Even if a negotiated settlement is achieved in Ukraine, trading relations between the West and Russia are probably irretrievably broken. The extensive use of sanctions and the currency transfer system to punish Russia also seems to have strengthened alliances between countries not aligned with the West, and made some countries reconsider their reliance on the SWIFT payment system. Couple all that with a belated recognition of the danger in relying on China for so many essential products, and we now have a global economic rearrangement underway that will affect the cost of living for all of us for years to come. The law of unintended consequences is powerful.
Yes, no kidding, something many people arguing we can get “back to normal” fail to understand. The underpinning realities have changed forever, forget about Russia even being a ‘trading partner’ with Europe & understand that the clock is ticking on the western world’s relationship with China as well.
This is what uncoupling of trading relations actually looks like on the ground. It’s ugly and painful. People have to choose between feeding their kids and heating their houses. The US, EU and UK have collectively made rubles verboten. These are logical and foreseeable economic consequences of that political decision. There were many people saying this in April, but our politicians were too busy calling them “Russian stooges” and “Putin lapdogs” to hear anything they said.
Now those same politicians are trying to hide the consequences as the bill for their nonsensical preening and virtue signaling comes due.
‘Nonsensical preening’ = opposing in measured ways (arming and not fighting) the unprovoked invasion of a European country! (In succession to Crimea, Donbass etc). We are not owed a living, and the Ukrainians have it far, far worse. Although Britain isn’t much dependent on Russian gas, others are, and if they cease to be, that would be one good outcome from this war. It is such a shame we didn’t listen to more voices like yours in the 1930s! We could have settled down under Nationalist Socialist dominance in Europe, and no doubt many people would have done well enough. Poor old Taiwan need not expect any support either I suppose, never mind what the Taiwanese might think about the matter. It is shameful. Historically Russia was always an adversary of Britain, so if you want to take it back then, your case is no better.
And then again, when Trump promotes economic decoupling and protectionism it is a fine thing, but if any liberals do so it is outrageous. The inconsistency is staggering.
WW1 & 2 caused major economic shocks. Defending freedom can cost…alot. But it’s costing an awful lot less because Ukrainians are doing the fighting for us.
Fortunately it’s also woken us up to the danger of being energy dependent and broader supply chain reliant on Mafia/Leninist type regimes. This West stirs slowly and reluctantly but this jolt is much better now than when too late.
The real elephant in the room is that despite the faults of the Tories (and over a period of 12 years in government they’re bound to accumulate), would the alternative actually be preferable? How would the economic and fiscal policies of Labour, no doubt hamstrung by alliances with the SNP / LibDems / Greens, create a more favourable outlook for the citizens of the UK?
Until someone can usefully answer that conundrum, predicting defeat at the next election is imo premature.
Indeed. This very important point gets surprisingly little coverage in these discussions. There is an awful lot of ‘I don’t like the Conservatives’ in the air at the moment – and that may well be reasonable to a greater or lesser extent. But it is not I think being accompanied by any sort of passion for the opposition, or any other political movement for that matter.
I just can’t see a change of government doing much. It is almost inevitable that at some point the Russians are going to have to be talked to and that is going to be a very big step for a lot of people whoever is in government. Labour have not exactly set out a different course on Russia, or on spending. The triple lock pension (mentioned in the article) is a bad idea whoever is in government, for example. Labour aren’t talking about getting the BoE to do anything differently.
Would we have a strong nuclear power industry 12 years into a Labour Government? It feels fanciful
The article says, ‘Like any Tory, he will also find it difficult to navigate around the economic costs of Brexit.’ I fail to see how Brexit, and the failure to make it work better or be less bitter, can be ascribed to one or the other party.
And all this is before we get to the culture wars – I have long-thought that BLM kneeling picture would haunt Keir Starmer and I won’t weep if it does.
I agree with you – absent another political movement coming along quick, which looks unlikely, a further Conservative government is not theoretical. The question that so often gets ducked is not so much about ‘how awful are the Conservatives’ but why people can’t coalesce around something different. Because until that happens we’re all rather stuck. And perhaps those of us who do want ‘something else’ might remember the wisdom of being careful what one wishes for – France wanted ‘something else’ and Macron came along.
That’s a very good post. I’d be curious to read your assessment of the chances of the Reform Party.
Could they damage the tories enough, in enough constituencies, to make them lose badly?
Or are these forecasts simply political
Sunak & Johnson where at the wheel when the car crashed and he’s now trying to blame Truss who was not in power long enough to make a material difference.
Either Sunak is a genius who solved all the problems as chancellor & created your 30bn surplus or he’s an irresponsible socialist who gave all the money away while forcing the population to take 2 years holiday at his expense.
I suspect this whole forecasting business is as big a pack of lies as the covid modelling – the numbers made up to suite the political goals of those in charge of the spreadsheets
If only there was a way to target sky high taxes upon those people who pushed for extended lockdowns, net zero and sanctions on Russia. Collectively these people easily have enough money to fill the ‘black hole’, and if there was any justice in this world it should be them that pay for it.
As it is we will all have to, whilst at the same time enduring a hobbling of the spending and investment that would seem our only route out if this spiral of decline.
The only tiny win is the end of cheap money and QE – mechanisms which have surely allowed the idiotic indulgences above, and allowed people to think that they dont really come at a price. In the future, if folk want to push for cripplingly expensive policies they should expect to see their wages dramatically reduced accordingly.
We can but hope that this is sufficient to halt the lunacy – but I’m not holding my breath.
Those who pushed for the things you listed, are in charge of the country. Until they are out things will not change, I would suggest getting a Conservative Party in to power would be a good start.
But where can we find a Conservative Party? The last one turned red and went missing in action.
I don’t really understand how the system works, but I read somewhere that the super rich have increased their wealth over the COVID period by a staggering amount, something in the range of 7 trillion bucks (!), largely as a result of QE. That money has to come from somewhere. Maybe they could chip in? Not holding my breath…
It’s bizarre, the current leadership of the Conservative Party seem to want electoral defeat, as revel in imposing measures for which they have, or could never get, an electoral mandate. The Chancellor has accepted responsibility for tackling inflation through fiscal policy, allowing the BoE, which supposedly has an inflation mandate, to wriggle free. Interest rates will remain massively lower than inflation, supporting asset valuations, while consumers and businesses are weighed down by higher taxes. The only measures which have survived are the removal on the cap on bankers’ bonuses, the cut in stamp duty to support property valuations, and a reduction in the levy on bank profits from 8% to 3%. In whose interests is all this?
The faux Tories are utterly clueless and despite all their PPEists etc have been for decades. They haven’t and don’t have any principles or grand strategy, being more concerned with appearance, and it has finally caught up with them as events turned really nasty.
The Critic has a great article on the BoE that is worth the read.
The problem for the conservatives is that they have over many years failed to promote conservative thinking people in the bureaucracy, the NHS and the BBC. These are all captured by leftists who favour anti-growth and collectivist policies. While Diversity directors flourish in these bodies we can’t accept the cries of austerity. Instead the Conservative party have been infiltrated by those who don’t prioritise the preferences of conservative voters.
There has been no long term thinking. Hence our failure to have a nuclear power stations so that we were not so reliant on oil from Russia. Confidence in an economy as in a company is a perception and once that confidence is lost as a result of previously hidden errors of management coming to light it is hard to recapture without fairly drastic measures. Unfortunately, neither Sunak or Hunt have the radical instincts of Thatcher that managed to reverse the decline of the UK for a period and reverse some of reliance on borrowing that now constrains the Chancellor, although, as the author observes she spent too much of the capital she inherited on an unreformed welfare system. The facts of life are fundamentally conservative and don’t support the the incontinent spending that a leftist bureaucracy would wish to indulge. The prosperity of the country relies on individuals working hard to supply goods and services that other individuals desire and are willing to pay for. The business of government should be to facilitate this.
Tony Blair’s Labour were gifted the benefit of an economy transformed by Lady Thatcher and her chancellors and they lived off that throughout their time in power. The Tory modernisers drew completely the wrong lesson from that and decided to govern (as best they could) by imitating New Labour and ignoring conservative fundamentals: hence the mess the country is in now.
Correct. But we must make the distinction between the British State and the ‘Government” or Executive. The State as created by Blairism is a super enlarged political force -loaded with utterly committed to the EU and the credos of the progressive Left – welfarism (20% real unemployment/mass migration/net zero fundamentalism/diversity and multiculturalism/suspicion of enterprise/class envy/social engineering in education – a toxic brew defended aggressively by human rights laws and an evangelical Pravda BBC. They have stopped Brexit from unfolding and pick off key Brexiteers one by one for attending leaving dos and ‘bullying’. The Tories have failed utterly to tackle this swamp and – by embracing the madness of Lockdown and the magic money tree – have destroyed themselves. If Rishi and Hunt had any balls they would use these years to start the counter- revolution. Reform the NHS via the French system. End the public sector pension greedfest. Tackle welfarism at home and the violation of our borders. And support not suffocate the enterprise sector. Only such measures will arrest our decline into a proto East German State. But do they see the need? Do they recognise we are in a doom loom now??
Just because they have given up on reelection doesn’t mean they won’t court popularity by shirking hard decisions. It’s just the groups whom they intend to pander to are no longer the British electorate. After the election, they intend to follow the path trodden by William Hague (employed by JP Morgan and Citibank), George Osborne, and many others. It may not be in the national interest, but they’ll make damn sure it’s in their own interests.
The main problems are that we have allowed GDP to grow through immigration into lower paid jobs resulting in a declining GDP per capita (the real measure of wealth) and increased pressure on public services without enough extra tax to pay for it. We have been running a public sector deficit always brining new excuses as to why it will take a few more years to balance the books. As a nation we have failed to develop our own energy resources, infrastructure and manufacturing, always being content to buy stuff from other countries (no this hasn’t helped global carbon as we have simply exported the problem and made it worse). This simply cannot go on. A great reset is needed, probably after the failure of the next Labour government. The Conservatives have been in office for over a twelve years and are part of the problem. They have had opportunities to sort things out but have not done so. Many of the issues were made worse by the Cameron government (cutting back on infrastructure spending and nuclear development) and the May/Johnson governments (ever increasing the size of the public sector). For this chancellor and the Conservative government there is no way out – they should go now.
I agree with you completely although I would say that the Conservatives are not part of the problem, they are the problem.There is a tendency on these threads to blame an amorphous blob or the elite when the situation we are in is the result of 12 years of government by a party that cares more about Daily Mail headlines that it does about actually doing something useful.
It’s interesting that the conservative period we are in started with George Osborne’s austerity and may end with Jeremy Hunt’s austerity. I wonder if they will be leaving a note in the treasury “Sorry but there isn’t any money”.
As Josiah Stamp so beautifully put it:
“Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take away from them the power to create money and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.”
Josiah Stamp, Ist Baron Stamp, Director of the Bank of England, Chairman of the L.M.S., 1880-1941.
First, the next election is lost. The best the Conservatives can do is to provide competent government for two years, as a start to rebuilding their shattered reputation.
Second, there is scant evidence that GDP growth is responsive to changes in government policy. Apart from the shocks imposed by lockdown and the banking crisis, the only discontinuities have been associated with high inflation. The government should prioritise getting inflation down, and otherwise let the economy look after itself.
The emphasis on growth is misplaced. It’s not the size of the economy that counts, it’s what the economy does. Government can actually do something about inflation, unemployment, poverty, inequality and the quality of public services, all of which actually affect lives.It can also do something about government debt and environmental damage, which are the legacy we leave to the future.
Your second paragraph reflects exactly my feelings about what governments can and should do. Unfortunately this government has no interest in any of those unlike the Blair / Brown government. They were not perfect but at least they tried to do something on all those fronts and they cared unlike the current lot.
If it is lost, then the Tories must be radical and begin the process of tearing down the Blairite Socialist State!!!! Dont tinker and do timid austerity. Start the reform of appalling NHS. End defined benefit pensions in the public sector. Reform the Equality Acts. Resolve the border law issues. DO important things to give UK a chance of escape velocity from the quagmire we are in after it chokes under the identitarianism & statism of Starmer.
Strange as it may seem, I saw Bair as a Tory!
This is a really fine piece, so far as it goes. When it comes to finding the drivers of prosperity, however, which are supposedly what governments are to enable, meditations about pies don’t help. It all gets very vague down there, below the clean work of finance.
‘Austerity’, if you mean any vague notion that the government can’t tax and print money in an eternal Ponzi scheme, isn’t a choice, it is a necessity! We don’t live in a small ‘night watchman’ state, or anything resembling it! Just mouthing mantras like ‘investment which so often ends up meaning ‘investing in people i.e. giving them all pay rises) doesn’t change the situation.
‘Austerity’, if you mean any vague notion that the government can’t tax and print money in an eternal Ponzi scheme, isn’t a choice, it is a necessity! We don’t live in a small ‘night watchman’ state, or anything resembling it! Just mouthing mantras like ‘investment which so often ends up meaning ‘investing in people i.e. giving them all pay rises) doesn’t change the situation.
Frankly I would have preferred it if Truss and Kwarteng had remained.
Frankly I would have preferred it if Truss and Kwarteng had remained.
As a floating voter living in York (320km North of London if you need to find it on a map) I find it hilarious that a lot of commentators here seem to find left wingers (communists?) everywhere including in the City and the MSM.
Truss was a disaster as PM as her previous government posts would’ve predicted and as a result the UK is now an international laughing stock politically and economically.
Whoever wins the next election will have to clean up the mess made by her and Boris.
Why do parties elect incompetent leaders who are obviously not up to the job – and I include Jeremy Corbyn and Gordon Brown in this list as well.