Jeremy Hunt is a lucky politician. The failure of his predecessor made him Chancellor of the Exchequer. That and the energy crisis forced him to take drastic measures last november. Since then, falling gas prices have eased pressure on the economy and public finances. But he has also used his new room for clever maneuvering. There are sensible ideas in the budget. It is not variable. But the pairing of Rishi Sunak and Hunt is capable. It’s a nice change.
Summary by Office for Budget Responsibility Where the UK economy is and what the Chancellor has done is straightforward. The near-term economic slowdown will be short and shallow, medium-term output will remain high, and the fiscal deficit and net public debt will be lower than expected four months ago. A large part of the explanation is that wholesale gas prices have more than halved in the past six months and are expected to decline further, which will strengthen gross domestic product and lower inflation. (See chart.)
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However it must not be carried. Structural weaknesses persist. Significantly, business investment has stagnated since 2016, as a result of Brexit uncertainty, the pandemic, the energy crisis and a spike in the after-tax cost of capital. Labor market participation has fallen dramatically since the start of the pandemic. As a result, the labor force is 520,000 people smaller than expected before the pandemic. Above all, productivity has grown at less than half its rate before the 2007-09 financial crisis. One must add to these long-term difficulties that the cost of living crisis remains severe, core public services are underperforming and attempts to reduce the real earnings of public sector workers in response to unanticipated inflation are creating an inevitable (and deserved) backlash.
According to the OBR, the Chancellor has spent two-thirds of his financial expenditure on his budget measures. This further supports energy bills and business investment in the near term, while increasing labor supply in the medium term. will do its steps, Chancellor arguesInflation has come down by around 0.75 percentage points this year.
Despite this larger and better economic outlook, real household disposable income per person is expected to decline by a cumulative 5.7 percent between 2022-23 and 2023-24. The decline is 1.4 percentage points below the November 2022 forecast, but is still the largest two-year decline since 1956-57. Real living standards are forecast to be 0.4 percent lower in 2027-28 than before the pandemic. It’s almost a lost decade and comes on top of a very weak previous decade.
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For what it’s worth (not much, given A ridiculous history of broken and then abandoned financial rules), the Chancellor foresees hitting the target of a falling ratio of net public debt to GDP (excluding the Bank of England) by a margin of £6.5bn (just 0.2 per cent of GDP) in 2027-28. That is the smallest headroom any chancellor has had against his primary fiscal target. Given the risks of higher interest rates and a worse economy, this is a gamble. Does it matter? Maybe not. It is difficult to predict if and when the markets will turn against the country.
This decision to use his new margin of maneuver to the limit must make political sense: for his party, the future is near. Whether it makes sense economically and socially depends on the wisdom of the measures themselves.
The most expensive measure is the 100 per cent allowance for capital expenditure, which costs an average of £9bn per year over three years. The measure itself is desirable. But it needs to be permanent. It is predicted to disappear because it would otherwise break the Chancellor’s rules. This is clearly stupid. If it’s important (it is), Hunt should suggest long-term ways to finance it. This is another example of the failure to systematically address spending and taxation together, evident in the refusal to recognize the costs of meeting commitments.
Another major set of measures is directed at increasing labor market participation, the most important of which is greater support for childcare. This should be considered as a permanent addition to the welfare state. So, there are new disability and welfare measures, more generous pension tax allowances and more spending on defence. This will add up to £8.3bn of extra spending in 2025-26.
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In themselves, these measures are largely welcome. For example, the OBR believes the measures will increase employment by 110,000. Higher employment is good in itself and will also increase GDP. High defense costs in times of war seem almost inevitable nowadays. But the liberalized treatment of pensions is arguably excessive and benefits only the well-off.
Several other notable features of the budget are: plans for 12 new investment zones; Transferring responsibility for local economic development to local authorities; promotion of financial autonomy of mayors; the decision to classify nuclear energy as “environmentally sustainable”; State Finance of Sizewell C Nuclear Generation Project; promoting innovation by speeding up the regulation of new drugs; and encourages artificial intelligence.
Overall the chancellor is riding on his luck. He has drawn up a set of measures which should bring about some structural reforms. But the basic picture is one of a life crisis, a dysfunctional public sector, an unhappy public sector workforce and a less than vibrant economy. Will this budget change all that? I doubt it. Will he win the next election? I doubt it too.
martin.wolf@ft.com
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