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British fiscal events are essentially political. This is particularly true when an election looms. But they need to have the trappings of economic sense and fiscal probity. This is particularly true for Jeremy Hunt, a chancellor of the exchequer who inherited the job from Kwasi Kwarteng, who had, under the direction of his boss Liz Truss, blown up the UK’s reputation for fiscal sobriety. Hunt’s job has been to combine the appearance of sobriety with tax cuts pleasing to his party and, he hopes, the voters. Judged by these standards, he has done quite well. But that does not mean that either the policy or the performance makes good sense for a country in the UK’s position.
What is that position? In the fourth quarter of last year, real gross domestic product per head was 28 per cent below what it would have been if the 1955-2008 trend had continued. In other words, if growth had continued as before, GDP per head would now be 39 per cent higher. This does, of course, explain why standards of living have stagnated, pressure on public spending has been so powerful and, however much the chancellor may wish to conceal it, the ratio of taxes to GDP, already higher than at any time since the 1940s, is forecast to jump by a further 0.9 per cent of GDP between 2022-23 and 2028-29.
In all, this is a disaster. The chancellor is right that performance elsewhere has been rather bad, too. But his tendency to fall back on favourable comparisons with the growth of GDP in other large European countries flatters to deceive. As he knows well, the UK’s relatively good performance in this respect largely reflects immigration, which has been exceptionally high, not least in 2022 and 2023. The more relevant comparison is on GDP per head. The UK’s performance is not at the very bottom, but only a few significant countries, notably Canada and France (apart from those hit hard by financial crises), fall below it.
Given this record, what one would want from a serious policy process would be a government-wide strategy for transforming economic performance. What we have instead is a long list of ideas, some good, such as expensing corporate investment, and some rather less so. But none of these have (rightly) persuaded the Office for Budget Responsibility to change its view of the economic future in any significant respect. Its forecast for productivity growth between 2024 and 2028 remains at a (relatively optimistic) 0.9 per cent a year. The outcome could be worse.
A good political process would have concluded from the recent record and prospects that business as usual does not work. Making these regular events (along with largely uncoordinated spending reviews) the cornerstone of the policy process has failed. It fails to recognise the need for long-term thinking on how to raise high-quality investment, innovate faster, improve capital markets, set priorities for development of human capital and, ignored in the Budget, address climate change. To put it bluntly, the British policy process and the institutions in charge of it are broken. Yes, that is true elsewhere, too. But that is not an excuse. Can one plausibly imagine that stagnation on this scale can continue without dire consequences for the stability of our society?
Let us then turn away, then, from what matters to what has happened. Essentially, the chancellor has persuaded the OBR that he had enough room to promise modest tax cuts. The OBR had to grant its imprimatur, because he has made promises of frugality that almost nobody believes will happen, justified in part by promises of higher public sector productivity that are no less implausible. Moreover, he needed the unexpected jump in inflation even to be in this position. That turbocharged the decision to freeze income tax thresholds (which reversed a principal thrust of the Cameron government). It also allowed the government to squeeze the real pay of its employees in ways that would otherwise have been impossible.
Moreover, when Hunt became chancellor, he had to reinstate some fiscal rules. But the primary rule he chose — that public sector net debt (excluding the Bank of England’s holdings) should fall in the fifth, and final, year of the forecast — is so self-evidently gameable that the chancellor merely has to make implausible promises. In this case, he does not only game the OBR but also traps the opposition. Yet, as the OBR notes, even with his luck and implausible promises (not least that fuel duty will finally be raised), his headroom on meeting the target is a mere £8.9bn. This is far lower than the average headroom of £26.1bn left by his predecessors since 2010, against their rules. Given the risks, the chances that he or his successors will fail to meet the target then are very high indeed. But since it is always five years ahead, who will care?
This, then, is a doubly frivolous process. It is frivolous relative to the need to transform the dire performance of the British economy. It is also frivolous in its own terms, as a system for ensuring credible fiscal policy to meet sensible fiscal targets. It does not make sense to focus on an outcome always five years hence. It also does not make sense for the OBR not to be allowed to assess the credibility of the chancellor’s promises. This is not to doubt the value of the OBR itself. It has indeed improved transparency and helped prevent even worse policy.
Far more significantly, the old budgetary theatre does not work. Yes, it could be even worse. But it needs to be far better. The next government must dare to think afresh about the priorities, the policies and, not least, the process.
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William Turner is a seasoned U.K. correspondent with a deep understanding of domestic affairs. With a passion for British politics and culture, he provides insightful analysis and comprehensive coverage of events within the United Kingdom.
