Jeremy Hunt makes no jams today nor tomorrow

Jeremy Hunt’s Autumn Manifesto had two audiences: creditors and voters. She needed to convince the former that the UK government could be trusted with their money and she had to convince the latter that the Conservative government was doing its best to limit the damage to them and their families from a global economic storm.

So far, the chancellor appears to be doing well on the first objective. However, debt servicing costs have skyrocketed. The government has taken significant measures to achieve the second objective as well. But the hit to the real disposable income of households will still be massive. Meanwhile, he has embraced another set of fiscal goals and pushed through austerity designed to achieve them in the years following the upcoming elections. Promises of financial chastity in the future could not be taken seriously. It may or may not be delivered. But no parliament can bind his successor.

What is certain is the effect of Russian aggression on Ukraine. This is the main explanation for the huge revisions in the OBR’s forecasts since last March. The decision by Liz Truss and Kwasi Quarting to launch massive unfunded tax cuts and spending increases at such a juncture, while disavowing the input of the OBR and the Bank of England, was insane. Hunt did his best to pay tribute to these institutions: reason, he stressed, had returned. So far, fortunately, creditors agree. The so-called “moderate premium” on British bond yields has vanished. However, the jump in debt-servicing costs will be massive: according to the Balance Sheet Office, government interest spending will jump from 1.2 percent of GDP in 2020-21 to 4.8 percent in 2022-23.

Rising interest rates is a response to inflationary pressures. This is only one of the economic problems caused or exacerbated by the global jump in energy prices, which itself came on top of the post-Covid commodity price hike. Energy shock is not only inflationary. It is also characterized by a contraction of GDP, and even more so of real income, because it has significantly increased the cost of imports compared to exports. The result is a massive drop in projected economic growth and an even more dramatic pressure on household income.

The elements in this overall picture are amazing. The Balance Sheet office expects inflation to peak at a 40-year high of 11.1 percent in the fourth quarter of 2022, after it was revised upward from a forecast of 8.7 percent in March. It also expects the economy to enter a recession of just over a year from the third quarter of 2022 (i.e. now). By the first quarter of 2027, according to the report, “cumulative growth in real GDP since the last quarter of 2019 has fallen by 3.4 percentage points from our forecast for March”; 2.4 percentage points of this is due to lower cumulative growth over the forecast period. Moreover, the bulk of that is due to potentially lower growth and therefore likely to be permanent.

Martin Wolff Autumn Statement Chart: The Office for Budget Responsibility now expects a deep recession - UK real GDP growth forecasts (%)

Worst of all is what will happen to the real disposable income of the family. On a fiscal year basis, these declines are “by 4.3 per cent in 2022-23, which would be the largest since ONS records began in 1956-57,” says the Office of the Balance Sheet. This is followed by the second largest decline in 2023-24 of 2.8 per cent. cent.”

These massive reductions in living standards are taking place despite massive subsidy spending: fiscal measures since March are expected to raise real disposable income per capita by 4.5 percent in 2022-23 and 2.5 percent in 2023-24. The impact on public finances comes not only from the recession, but also from targeted spending to ease the burden on households. Additional spending announced since March amounts to £103 billion from 2022-23 to 2024-25. Budget increases in taxes and cuts in spending only start from 2024-25 (for taxes) and 2025-26 (for spending). The government will provide huge funds during the two years preceding the elections. Not surprisingly, financial goals are again missed. Indeed, public sector net debt is now expected to reach a 63-year high of 97.6 percent of GDP in 2026-27, compared to a forecast of just 78.9 percent last March. It is indeed a huge storm.

Martin Wolff Autumn Statement Chart: Cost of public debt service has risen - UK debt interest spending as a percentage of revenue, of GDP (%)

Is there some good news? Yes, the Office for Budget Responsibility thinks inflation could be heading lower in 2024. If that’s the case, then interest rates could go down. The Ukraine war may end sooner than now expected, although the chances of it reversing to put pressure on gas supplies seem slim. All in all, it is about weathering a storm that will be very traumatic for a large part of the audience. Could the government have done more to cushion the blow? Just by wanting to raise taxes even more.

Long-term questions are often left to one side. There is certainly no sign of radical new thinking about growth. Even worse, the crisis is dealing a huge blow to already weak business investment, while the government plans to cut capital spending as well. These cuts are sure to manifest in a long-term weakness in potential output.

However, there are things that can be done inexpensively. Hunt and Rishi Sunak’s most important achievement is to reintroduce a degree of coherence and predictability into policymaking. That should certainly extend to our relationship with our most important economic partner, the European Union. The era of the Brexit fantasy finally needs to pass. At the very least, and especially in a time of radical uncertainty, doubts about future business relationships should end. So let’s agree on Northern Ireland, drop the totemic feud, get as close and reliably stable an economic relationship with the European Union as possible, and then move on. The time has come to do so.

martin.wolf@ft.com

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