When it comes to a Budget or an Autumn Statement, very often the most interesting question is not “what did the chancellor do?” but “who was the chancellor trying to impress?”
Some fiscal events can be defined as being essentially economic, designed to attract investment or reassure the markets. Others are more political, designed to appeal to voters or even just the party.
The identity of the target audience is particularly significant as a parliament draws to its close. Chancellors are often judged on the extent to which they put the country’s long-term interests over their party’s short-term electoral interests. Do they loosen the fiscal purse strings in the hope of stimulating an election-winning boom (if all goes well) or ensuring that the other side does not have too golden a legacy (if the election goes badly)? Norman Lamont cut taxes on the eve of the 1992 general election campaign, a ploy that was so successful that he was still in office to put taxes back up afterwards. Roy Jenkins, in contrast, was never fully forgiven by Labour for his fiscal rectitude in 1970, even though it enhanced his reputation in the country. Ken Clarke also remained cautious with the public finances in 1997 and the Tories lost. Go for broke, stimulate a boom and still lose, however, and your reputation is forever tarnished. Reggie Maudling and Tony Barber are on nobody’s list of great chancellors.
An independent Bank of England slightly changes the dynamic (a significantly looser fiscal policy being likely to result in a tighter monetary policy), but the question remained as to how political a chancellor Jeremy Hunt was going to be. He obtained the position because he could reassure the markets after the chaos of Kwasi Kwarteng’s mini-Budget. He is also, presumably, in his last big political job with more than an eye on his legacy. Conversely, he is defending a marginal seat (South West Surrey) and has a prime minister who is not going down without a fight (even if he is struggling to land any blows). Yesterday’s Autumn Statement was a chance to assess who Hunt and the government are trying to impress.
The first test relates to the overall fiscal position. As was widely trailed (and, as a former Treasury minister, I find it surprising the extent to which Office for Budget Responsibility forecasts and specific tax policies were trailed), the government’s fiscal headroom has improved since March.
Three caveats, however, must be applied. First, the relevant fiscal rule is that debt is falling in the fifth year of the forecast period and a lot can happen in four years. The headroom of £13bn is still relatively tiny. Second, the supposed headroom also depends on some unlikely assumptions over public spending. Inflation has increased tax revenues, but it has also increased spending pressures (such as higher public-sector pay). The government is working on the basis that these pressures will be resisted, with real-terms departmental cuts of £19.1bn by 2027-28. We should be sceptical about that. Third, debt – even if it does fall in the fifth year (to 92.8 per cent of GDP) – is high and will only have begun to fall very gradually. We are not well placed for future turbulence.
The question for Hunt was how much of the additional headroom he was going to use up. The answer is almost all of it. Inflation delivered an additional £27bn of tax revenue and nearly all of it has been spent on tax cuts.
Then we come to the specific measures.
Some of Hunt’s firepower has gone into making the full expensing regime for companies permanent rather than temporary. The motivation for this is to increase business investment and, therefore, productivity. I happen to hold the unfashionable view – long espoused by Sunak’s hero, Nigel Lawson – that it would be better to have a broad tax base with low rates. Corporation tax has risen significantly from 19 per cent to 25 per cent (a choice of tax increase that was driven by politics, not economics) but this measure provides some mitigation.
The biggest measure is the 2p reduction in National Insurance (NI). Again, these tax cuts must be put in the context of much bigger tax increases on personal income (rising by the equivalent of £4,300 per household compared to 2019). We have two taxes on income: NI – with its narrow and distortive base – is a worse tax than income tax. The policy also fits with the “reward work” theme although it will not have a transformative effect on labour market participation. And just because inflation will be lower by the time the tax cut takes effect in January (although not at the 2 per cent target), this does not mean that it is affordable. The purpose of taxation, after all, is to fund public services, not control inflation, despite the claims of proponents of modern monetary theory.
Where does this leave us in terms of assessing Hunt as Chancellor? The tax cuts he has announced are perfectly sensible and will do some good, as will some of the other supply-side reforms announced. He has eschewed cuts to inheritance tax that would have served no useful economic purpose and would have been a political misstep in the current circumstances. But in terms of the big judgement of what to do with the additional headroom inflation has given him, he has been very political by filling it. He has done so almost exclusively by cutting taxes. This will leave some parts of government facing very painful cuts in the unlikely event of these spending plans being maintained. Ultimately, this was a political Autumn Statement. Hunt’s Prime Minister may be grateful, but his successor as chancellor certainly won’t be.