HAMISH MCRAE: Brace for a gloomy Budget, but let’s look beyond that to the upside in 2024
Walking the walk: Chancellor Jeremy Hunt has to make ‘eye-watering’ decisions about ‘very difficult choices’
It will be a dismal week. We are promised ‘a tough road ahead’ by the new Chancellor Jeremy Hunt, who has to make ‘eye-watering’ decisions about ‘very difficult choices’ in the Autumn Statement on Thursday over future tax and spending plans.
The dash for growth project of Liz Truss and Kwasi Kwarteng is stone dead. Not only will we all end up paying more tax, on top of higher energy bills and higher mortgage rates, but public spending plans will be trimmed too.
And all this comes against a background of an economy slithering towards recession. Oh dear.
On Thursday, we get three main things. One is the new forecast for the economy from the Office for Budget Responsibility. A second is the medium-term spending plans of the Government. And third, there are their plans to tax us.
These three elements are stitched together to show the Government is indeed being responsible, in that the debt-to-GDP ratio will fall in the long term. The OBR then gives it the seal of approval and the markets are happy to fund the debt. That’s the idea. But in the real world, life is more complicated. The OBR is not particularly good at forecasting – though nor, to be fair, particularly bad. In the past couple of years, the Government’s deficit has come down much faster than predicted, though this year things have gone the other way.
Medium-term spending plans are fine. But little matters, such as the pandemic and the need to help people pay their gas bills, change everything. And taxes sometimes bring in more cash than expected, sometimes less.
So come Thursday the challenge will be to take each of those three bits and try to work out which parts are realistic and which overly pessimistic. Overly pessimistic? Well, yes. There is a strong incentive to be so, because if things turn out better than expected, then the Chancellor can attribute the success to his wise stewardship. That is why Jeremy Hunt has gone into full horror mode this week. Tell ’em it will be terrible and when 18 months from now things have turned out more or less all right, he takes the credit.
He might then be able to cut the taxes ahead of the next Election.
With this in mind, what’s to look for? On the forecast, the most important element will be the shape of the recession next year. It looks as though we may scramble out this year without a recession, because though the economy did shrink in the third quarter, it could eke out a little growth in the final three months of this year.
But the first half of next year does not look good, as energy prices, higher interest rates and a stagnant housing market will bite into demand. I could see a decent bounce in the second half of 2023, if inflation and hence interest rates come down faster than expected. But let’s see what they say.
Last week’s improved US inflation numbers – and hence the prospect of their interest rates not rising as much as expected – gave Wall Street one of its best days for years, despite all the kerfuffle over the cryptocurrency mess. One side-effect was to trim the dollar and boost the pound up to $1.18, still far too low but the highest since late August. Our ten-year gilt yields are now 3.35 per cent, not that much above the level before the Truss-Kwarteng budget adventure.
On spending, it will be a straightforward question embedded in the complexity of the huge numbers involved. Government spending this financial year is budgeted to be £1,087billion. That is equivalent to around £35,000 per household. The question is: what are the priorities? If you increase state pensions in line with the triple lock, what do you cut to give you the cash to do so? Whatever you do, there will be protests. So who are you prepared to upset?
As for the third element, taxation, the big issue is how much is done by stealth and how much do taxes explicitly increase.
As we show today, inflation pushes people into higher tax bands and that brings in a lot more money. Total Government revenues this year are budgeted to be £987billion, leaving a projected deficit of the nice round number of £100billion.
Maybe stealth is best. Remember the famous adage of Louis XIV’s finance minister Jean-Baptiste Colbert? It was that, ‘the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing’.
There will be plenty of hissing on Thursday. But let’s try to look beyond that to the upside in 2024. There is a turning point out there. We just don’t know when.