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“Do no harm” is a pretty unambitious goal for a fiscal event, but it is a maxim Britain’s Chancellor Jeremy Hunt ought to heed when setting out his Autumn Statement on Wednesday. Although inflation has recently fallen by more than expected, interest rates are high and the economy remains frail. The scope for spending is greater than anticipated in the spring, but room for manoeuvre is limited. The financial market chaos sparked by Liz Truss’ disastrous “mini” Budget in September 2022 also remains firmly in the memory.
The UK needs a disciplined statement that sets out a plan to lift its long-term growth potential. Yet with an election looming, the government also faces short-term political pressures. How Hunt balances these conflicting priorities will determine whether the chancellor’s midweek speech is a boost or a restraint for the British economy.
The fiscal situation remains tight. Projections suggest that higher tax revenues have increased the chancellor’s headroom of £6.5bn, against the aim of having debt as a share of the economy falling in five years. But, there is considerable uncertainty surrounding the medium-term economic forecast, and fiscal projections currently rely on unrealistic future spending squeezes. So it is not wise to use up all the space he has. Britain’s debt stock is elevated and its interest bill as a proportion of revenue is one of the developed world’s largest. Bond markets are shaky too.
Hunt should focus any spending plans on raising Britain’s growth potential. This will support the country’s debt sustainability and help to lower inflation pressures. Boosting business investment by making the full expensing of capital spending permanent should be a priority. It would be costly in the short term, but it would raise the government’s tax take over time and bring stability to the corporate tax system.
Hunt also needs to set out a broader strategy to raise the UK’s long-term growth. Some sensible measures to reduce worker inactivity have already been announced in a Back to Work Plan. But the chancellor should also detail efforts to encourage pension funds to invest more in domestic enterprises and streamline the country’s sclerotic planning system, which prevents it from building homes and vital infrastructure. These need not be costly as they primarily involve tweaking regulations. Above all, the measures need to convince the Office for Budget Responsibility to raise its potential growth forecasts, which will raise the fiscal headroom. That is especially important if the government intends to engage in pre-election giveaways at the spring budget.
Resisting the political pressure to slash taxes is essential. There are reports of planned cuts to income tax or national insurance. Unfunded cuts would be inflationary, and adding to the debt pile is unwise. It would also be difficult to make offsetting reductions to spending — public services are already strained, and demands on government expenditure are only growing. A comprehensive plan to improve public sector productivity would help. Reducing the inheritance tax rate, as has been mooted, could be a reasonable measure in time, but it needs to be accompanied by wider reform.
Hunt should not shy away from direct revenue-raising policies either. Cancelling the routine freeze on fuel duty would be sensible, but is a no-go politically. One option is to reform the triple lock on state pensions, so that they rise in-line with earnings growth in the long term. That would reduce outlays, and it would be fairer. The government should, however, avoid the temptation of uprating benefits below the usual September inflation baseline, as it would hit the most vulnerable.
Many Conservative MPs are clamouring for giveaways to voters. But this is a government that has sought to appear competent and fiscally responsible — “long-term decisions for a brighter future” is its mantra. For the nation’s best interests, on Wednesday, it should stand by its word.