As Jeremy Hunt has discovered, you can’t please all the people all the time. On one hand, the Chancellor has introduced the biggest tax cuts and supply side reforms since Nigel Lawson’s tax-slashing in the 1980s. Yet the overall tax burden is still set to rise to record post-Second World War levels with tax representing record levels against GDP of 37.7 per cent because of the continued freeze on personal thresholds.
At the same time, the Chancellor says the country has finally turned the corner while shadow chancellor, Rachel Reeves, claims that 13 years of Tory mismanagement have driven the economy into a dead-end.
As always, the truth is somewhere between these extremes. Hunt had a difficult hand to play as we are still paying through the nose for two of the most severe shocks – the Covid lockdown which cost more than £400 billion and the energy shock from Russia’s war on Ukraine – suffered in the post-war years.
So to be fair to the Chancellor, the country has indeed turned the corner, or at least turned a corner. What we don’t know is how sharp that corner will be and whether the road being travelled is on an uphill trajectory.
On balance, Hunt did well to combine tax cuts with more than 100 other pro-growth supply side reforms in a multitude of areas ranging from finally attempting to free up planning log-jams to pension reforms. And he did so with the numbers adding up.
Which is why the financial markets barely twitched, share prices of the UK’s biggest listed companies trod water while bond yields more or less stayed where they were, as did sterling against the dollar. Job done.
Step back a year ago to last autumn’s turmoil after Liz Truss’s much-dissed Budget went down in flames, even though much of which would not have looked out of place in Hunt’s own autumn statement.
What a difference a year makes. All budgets and financial statements are political – as well as economic – both in content and intent. And this Autumn Statement was no exception with a do-or-die election looming at some point next year.
And there’s no question that Hunt’s National Insurance tax cuts signalled even bigger tax cuts ahead of the next election. His fellow MPs were in no doubt about that, greeting him when he arrived back in the Commons committee room after his speech by thumping the tables.
They weren’t the only ones to give his reforms the thumbs-up. So did many of the UK’s small business leaders – not known for their enthusiasm towards this government or politicians in general – who greeted them as “game-changing.”
That’s quite an accolade from the usually grouchy SME trade associations and lobbyists who usually have the most uneven fight to get their voices heard in Whitehall or Westminster.
For once they have been listened to. More importantly, action was taken on many of the measures they have been lobbying for. In a rare moment of praise, Tina McKenzie, Policy Chair at the Federation of Small Businesses said the Chancellor and the Treasury deserved credit for driving pro-small business changes which not only included the NI cuts but action on late payments, small businesses’ rates, and self-employed taxation. That’s no mean feat: small businesses employ 16 million people or over half of the country’s entire working population. So the FSB’s welcome was a big thumbs-up for Hunt.
Big business was also given a boost with the decision to make expensing of capital investment permanent, which means businesses can write off the full cost of first-year plant and machinery investments. The UK is one of only three European countries – only Estonia and Latvia offer a similar allowance. While the impact of full expensing will take a few years to work through the economy, it was still an important decision to make and shows the direction the government hopes to take.
Some might argue – as Hunt himself did a couple of years ago when he stood to be party leader – that a cut in corporation tax would have been even better to revitalise industry and employment. Hey ho.
The question now is whether Hunt’s reforms such as slashing National Insurance taxes and abolishing Class 2 NICs for the country’s four million self-employed will prove to be anything more than just a sugar rush. Will they get the country driving again in anything more than low gear?
His tax cuts are certainly not the big bazooka that many commentators had been hoping for in the dash to lift the economy out of potential stagnation. In total, the tax cuts amount to £21 billion – to be found from the fiscal headroom which the government now has because of increased tax revenues. On the other side of the coin, government departments face £19 billion in cuts in real terms due to inflation. Where such cuts will be found has yet to be revealed but they will inevitably prove harsh unless there are productivity gains to match lower spending.
There was one area where Hunt will need to provide far more detail, and that’s to explain how the reforms to benefits to get more people back into work will work. While it’s hard to disagree with the tightening of criteria and the 18 months deadline to find work for those on benefits, they do come across as brutal as there are many people who will not be able to meet the new deadlines through ill-health and other incapacities. Which is why it’s essential there must be some sort of ultimate safety net included.
While Hunt provided some cheer, the overall background is still looking stark. The Office for Budget Responsibility expects the economy to grow by 0.6% this year and 0.7% next year. After that, growth rises to 1.4% in 2025, then 1.9% in 2026, 2% in 2027 and 1.7% in 2028.
That looks pessimistic. Although the OBR has revised down its estimate of the medium-term potential growth rate of the economy to 1.6% from 1.8% at the March budget, its forecasts are misleading. As Julian Jessop, the independent economist, points out, the forecasts are misleading because the upward revision to the level of GDP recently by the Office of National Statistics suggests that the starting point is now much higher, which in turn means the economy is bigger and healthier than expected. Let’s hope so.
That depends on the voters and whether they will feel better off after the cuts go through, even though so many will be paying higher taxes because of the freeze on thresholds.
Indeed, dare one say the unsayable? Could Hunt’s attempt at triggering growth with so many supply side reforms even make the result of the next election hang more in the balance than the polls are currently predicting?
For what it’s worth, Labour’s response to Hunt’s measures was feeble in the extreme. Neither Keir Starmer nor Reeves were able to say what they would reject. Nor were they able to give any hint as to what they would offer in its place other than to mutter that the tax burden is too high.
Full marks then to Hunt for making a decent start after too many years of Chancellors driving into dead-ends: next time he should be brave enough to go for the big bazooka.
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