With the Autumn Statement commended to the House of Commons, the Government’s plans for the economy over the next few years are now clear. They largely consist of tax rises in the short term, with wealthy individuals and oil and gas companies taking the brunt, and a tightening of public spending post-2025 as a result of inflationary pressures eroding departmental budgets.
There has been much talk of the Autumn Statement being the beginning of Austerity 2.0 when actually departmental budgets are rising in real terms over the remaining years of this parliament. The NHS budget continues to rise with an additional £3.3 billion, whilst Education is also receiving a boost with an additional £2 billion. Other departmental budgets will face increased pressure as they are not raised in line with inflation, but this fiscal consolidation won’t really start to bite until the next parliament.
Nonetheless, the consensus is that in the short and medium term these are bleak times. With household incomes set to fall by 7% - the largest fall ever recorded (Institute of Fiscal Studies, Autumn Statement 2022), this is difficult to argue with.
The economic foundations of parliaments are set by the ones which precede them. With the country in recession for much of the remaining parliament and fiscal tightening to come, there will be little room for manoeuvre for whichever party wins in 2024. The country’s debt, which now stands at 102% of GDP compared to 28% in 2000 (ONS, UK government debt and deficit), will not reset in 2024. Debt is only forecast to fall as a share of GDP in 2027, more than half way through the next parliament.
And this is why Labour are no longer scary. There is limited scope for Keir Starmer to come into Office and tack left on the economy. We saw what happened when Liz Truss tried to bring forward unfunded, ideological economics. With the country’s debt as high as it is, the markets evidently do not take kindly to economic experiments. Debt interest payments alone will hit £100 billion next year (Institute of Fiscal Studies, debt interest spending) after huge sums were spent throughout the Covid-19 pandemic and therefore spooking the markets and increasing the price of borrowing in an attempt to bring about a socialist utopia is out of the question - debt matters.
Labour have been consistently polling at around 50% for a number of weeks and with the current economic turmoil and Labour’s newfound party discipline they are beginning to look like a Government in waiting. The scale of Labour’s polling leads is such that even the dizzy heights of 1997 are not out of question. However, Blair’s Labour rose to power in 1997 after 4 years of consistent economic growth. At the current rate, Keir Starmer may well win a landslide majority like Blair, but the economic circumstances his party face will hinder whatever plans he may have for the country.
This dynamic is underlined by the fact that Britain has expensive policy areas that are politically untouchable. The NHS takes up increasing amounts of the public monies for no discernible benefit, pressures on which will continue as the population grows older. The NHS budget is now at £152 billion a year, £30 billion higher than pre-Covid levels (HM Treasury). To merely suggest the potential for an alternative model of health care would be political suicide, with the NHS embodying an almost religious place in the British psyche. The need to harbour the ‘silver vote’ means that the expensive pension triple lock uprating policy is here to stay. Expenditure on the state pension already hit £101 billion in 2020/21 (www.obr.uk/forecasts-in-depth) and is now set to rise by billions in line with inflation. Unless fundamental reform is enacted, high levels of taxation is going to be the new norm to fund such political straight jackets. Departmental budgets are still well below their 2010 levels and with inflation eroding them further there is little left to cut which means the Government relies increasingly on taxation. With taxation at a 70 year high, however, the electorate won’t tolerate ever increasing taxes.
Another reason why Labour aren’t scary anymore is that the Autumn Statement was a Tory budget in name only. It was one which Jeremny Hunt’s opposite number Rachel Reeves would have loved to give: benefits raised in line with inflation, minimum wage increased, the windfall tax on oil and gas companies extended, the top rate of income threshold reduced, and greater public spending on the NHS. This was a social democrat budget. It is striking that just weeks after Liz Truss’ bold pursuit of growth, the Conservatives and Labour are beginning to be economically indiscernible. Labour may have gone further than Hunt and abolished non-dom tax status and introduced VAT on private schools but these are hardly game changing policies. With the Government spinning its wheels and now economically largely indistinguishable from Labour, why not give the other guy a go?
Jeremy Hunt will be hoping the measures put forward in the Autumn Statement will revive the Conservatives’ economic credibility. So far, however, the Conservatives have not been able to convince voters that the current economic climate is down to global factors. Inflation in America may well be at 10%, and Germany may also be experiencing negative growth next year, but polls show that the electorate are placing the fault of the current hardship with the Conservatives. A recent poll conducted by People Polling suggests just 21% of people blame the current economic turmoil on global events (18/11/22, People Polling).
Sunak and Hunt may well demonstrate that they have what it takes to manage an economy in challenging times, but if the electorate conclude that the economic malaise was Conservative made, they won’t receive any plaudits for fixing it. Moreover, if the Conservatives think they can fight the next election on a platform of austerity after 12 years in Government, caused in part by weak growth, they are in for a rude awakening. It is hard to see why the electorate would vote for more Tory wheel spinning.
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