Autumn Statement unpacked

No alarms and no surprises: There were few surprises when the Chancellor delivered his Autumn Statement last week, and in many ways this was the whole point. This was a fiscal event with the primary aim of reassuring the markets and the country that the government that the ‘grown-ups’ were back in charge and as a result the entire contents were extensively briefed beforehand. Rhetorically Jeremy Hunt attempted to do two things in the statement. The first was to deflect blame for the dire economic situation away from the government. The message was that a combination of Russia, Covid and (unspoken) his predecessor were responsible for the country's economic woes. The second was to reassure both voters and his own MPs that the choices he was making to manage those woes could have been worse, hence the talk of a “balanced approach” between spending cuts and tax rises.

• Context is king: The OBR was famously excluded from the last fiscal event, but the agency took centre stage here, predicting a long recession and the biggest fall in living standards on record. This combination, described as “horrific” by economist Duncan Weldon, was the main story from the day and presented a bleak picture of the next few years, with real disposable incomes set to be lower in 2028 than they were pre-pandemic and the value of workers’ pay packets not expected to return to their 2008 level until 2027 according to Torsten Bell of the Resolution Foundation.
• Moving the goalposts: In response, the main decision the Chancellor took was to loosen the fiscal rules set by his predecessor in order to avoid even greater spending cuts or tax rises. He extended the period until the debt-to-GDP ratio needs to be falling until the fifth year of the forecast period (up from three years), and introduced a new rule that total public borrowing in the same period should not exceed 3% of GDP. This loosening was in some ways a tacit admission that the government’s pre-statement rhetoric on the ‘fiscal black hole’ was always overblown, and the government always had the option of changing its fiscal rules. Interestingly, Hunt did not use the phrase ‘black hole’ once in the statement. (See our recent Digest on the fiscal debate). It is also a reminder that these rules define the terms of our political and economic debates, and they still receive relatively little scrutiny considering the enormous impact they have.
• Tough choices: These new rules may have been looser, but they still committed the government to a substantial fiscal tightening in the next five years. The Chancellor delivered this in two ways. The first was through a series of tax rises in the near term, billed as “asking more from those who had more”. In fact, the majority of the extra revenue came from freezing income tax thresholds for those on low and middle incomes - an effective reversal of the major tax policy of successive Conservative governments from 2010 onwards. CAGE’s Arun Advani unpicks the tax changes here, arguing that the government should have gone much further on taxing wealth. The second plank of the plan was a £28bn squeeze on public spending in the years after 2025, with some areas such as health and education protected. Tackling inflation was one of the justifications for these cuts, and inflation will make this squeeze feel even worse, with the TUC and NEF warning that public services needed an extra £43bn just to stand still.

That’s how you get a doom loop: The phrase ‘doom loop’ was heard from both sides of the chamber in the debate, referring to the idea that spending cuts and low investment would trap the UK in a cycle of economic stagnation, leading to more spending cuts. With the short-lived ‘plan for growth’ of the Truss era consigned to the scrapheap, the Chancellor reassured the Commons that the government was still committed to growing the economy. The problem, as IPPR’s George Dibb points out, is that the OBR thinks the measures announced will do almost nothing to lift the UK’s anaemic growth rate.

• Capital pains: In fact, the government announced cuts to the UK’s capital budgets from 2025 onwards, the very spending that is most likely to lead to growth in the future. With business investment also predicted to remain weak, and the government trapped by internal Conservative politics on issues like immigration and housing, it becomes increasingly difficult to see where growth is coming from in the next few years.

‍The big squeeze: The government saw stabilising the public finances as their task in this statement, but for the public the main issue is that their personal finances remain in crisis. Despite the squeeze on households, the government announced precious little help on the cost of living in the statement. The Chancellor attempted to present automatic upratings to pensions, universal credit, and the minimum wage as acts of generosity from the government, whilst announcing a small package of extra grants for the most vulnerable in 2023.

• High prices, guaranteed: Hunt also confirmed that his decision to abandon the pledge to freeze energy prices for two years would result in the level of the Energy Price Guarantee rising from £2500 to over £3000 from April 2023. As IPPR’s Carsten Jung points out, this is a far lower level of support than that being provided by comparable countries like Germany.
• Make me energy efficient, but not yet: Campaigners have long been calling on the government to invest in energy efficiency and home insulation programmes which would reduce bills, save government money, and cut down on carbon emissions. The Chancellor did at last commit to action on this front, establishing a new Energy Efficiency taskforce and a target to reduce energy consumption by 15% by 2030. But with funding not available until 2025, campaign group Warm this Winter warn that millions will still face fuel poverty this winter. 
• Pay under pressure: The other effect of the government’s squeeze on public spending will be to intensify the battle over public sector pay rises. Unison General Secretary Christine McAnea responded by warning that: “Health worker wages must be boosted now to prevent a damaging dispute this winter. Otherwise, the NHS can’t hang on to experienced staff, halt the damaging exodus of key workers or improve wait times for patients.”

A trap for Labour?: The decision to delay spending cuts until after the election in 2025 was justified by the Chancellor as a decision not to further weaken the economy going into a downturn, but has been widely interpreted as a trap for Labour. The message the government wanted voters to hear around the statement was that they are willing to take the tough decisions to deal with an economic crisis not of their making, while Labour refuse to face up to reality.

• Blame game: The first problem with this approach is that the public aren’t buying the argument that the cost of living crisis is not the government’s fault, according to polling for Channel 4 news. This largely explains why Labour continues to enjoy extremely healthy leads in general election polling, and this is before the energy price rises, tax rises, and biggest fall in living standards on record really hit home.
• Sound finances: For their part, Labour are not taking the bait. They have responded to the Autumn Statement by insisting that they are the party of ‘sound finances’, rhetorically accepting the need for fiscal discipline while stopping short of committing to specifics. Leader Keir Starmer explained that the economic context meant that Labour would be unable to do everything they want to do as fast as they had hoped. 

Cycle of stagnation: Labour’s main economic argument is that 12 years of stagnation and 12 years of chaos left the UK economy in a historically weak position, and that major investment (particularly in the green transition) is needed to force the UK onto a higher growth trajectory. Squaring this analysis, and the need to rebuild public services, with the commitment to fiscal discipline and the need to avoid the government’s spending trap will be the terrain for the coming years of political battle.