Hunt has spared us an austerity doom loop, but the investment revolution is dead
The Autumn Statement does not offer a way out of Britain's low-growth trap
No other country in the G7 bloc or among the major economies of Western Europe is opting for austerity on the cusp of a global downturn, even though most have higher primary budget deficits and higher public debt ratios.
None are opting for a fiscal retrenchment of 2pc of GDP.
Japan is launching a fiscal stimulus of £180bn, worth 5pc of GDP, showering the nation with a blanket energy subsidy and coupons for families with newborn children. The Biden Administration is pumping $1.7 trillion dollars into everything from green energy to semiconductor plants and rebuilding 30,000 bridges.
The International Monetary Fund thinks the UK will be back in primary balance by 2025, while the US will still have a primary deficit at 4pc of GDP, with Belgium at 3.6pc, France at 3.5pc, the Netherlands at 2.4pc, and Spain at 1.9pc.
The misadventure of Trussonomics is embarrassing but there is no evidence in market pricing that it has damaged the UK’s credit standing or that it requires a ferocious over-correction. Credit default swaps pricing sovereign bankruptcy risk for the UK are lower than for most of Europe, North America, or Asia.
The bond vigilantes are not clamouring for cuts, though it may be in the interests of Conservative Central Office to give that impression in order to play the electoral cycle and set traps for Labour. The Sunak-Hunt austerity package is a pure political choice.
As a matter of economic science, Jeremy Hunt’s plan is less destructive than feared. He has stretched out adjustment and avoided the worst pro-cyclical insanity. Research spending is preserved and the target of 2.4pc of GDP remains.
The capital budget for infrastructure projects will be sustained in cash terms through the Long Slump of the next two years, acting as a countercyclical buffer and blunting the impact of recession.
The core Northern Powerhouse and the roll-out of 5G and gigabit broadband will go ahead. So will the push for energy independence expansion through offshore wind, nuclear power, and home insulation.
It is much better than George Osborne’s austerity in 2010, which cut public investment to the bone, lowered the growth trajectory of the economy, and ultimately did more harm than good to debt dynamics. This time a fiscal doom-loop has at least been averted.
But nor does it offer a way out of Britain’s low-growth trap. It freezes public investment after two years, saving £14bn in what amounts to an 8pc cut in the capital budget.
This is national self-harm given that we know from global best practice that infrastructure projects have a multiplier of around 1.5 and therefore pay for themselves with interest.
Mr Hunt’s plan does little to correct the worst pathologies of the British economy. It further perpetuates some of them. We know what ails us: the UK consumes too much and produces too little, leading to a structural current account deficit of 4pc of GDP that requires constant inflows of foreign capital.
Investment is too low, although recent revisions by the Office for National Statistics suggest that the picture is not as dire as thought. The cure for low private investment is not to freeze public investment as well.
Mr Hunt should be doing the opposite: he should increase the capital budget, in turn unlocking the excess savings of the corporate sector. That is how you set off the virtuous circle of a capex boom.
The Chancellor is wasting money shielding the nation’s affluent half from the negative trade shock caused by Putin’s energy war and the fall-out from Covid, which has made the country 5pc poorer, until it blows over. One is forced to add, given the Brexit derangement syndrome of the British establishment, that most European states have suffered a comparable shock.
Mr Hunt is keeping a modified energy price cap for rich and poor alike, which amounts to a reverse transfer from low-paid workers to people in big houses with a higher energy footprint.
He is also keeping the triple-lock for pensioners, giving the wealthiest cohort of the country a double-digit rise at a time when public sector workers are facing an historic cut in real wages. The Office for Budget Responsibility thinks real household disposable income will fall 7pc over two years.
One can understand the politics of the triple lock. It is a pledge in the Tory Manifesto. Rishi Sunak’s government has no electoral legitimacy other than that document. But the Tories should never have pinned their colours to this mast in the first place. Pensioners in distress should be helped in other ways.
In order to pay for middle-class bungs the Chancellor is keeping the six point rise in corporation tax to 25pc, a level that catapults the UK to the upper end of the global league just as it is trying to attract capital for the post-EU transition. The average is 19.6pc in Asia, 19.8pc in Europe, and 23pc in the OECD.
The UK’s rate is already beyond the tipping point of the corporate Laffer Curve in a world of open capital flows, now thought to be around 22pc. Arguably it loses the Treasury money.
The picture is not as disastrous as it looks. The OBR says the two biggest causes of the deterioration in the public accounts since its last statement in March are gas costs and interest rate costs. It has overstated both.
Gas futures contracts currently average 311p over the first quarter of next year, far below the peak of 866 seen in August and close to the strike price of the current energy guarantee.
December contracts are today at 266p per therm and require no subsidy at all. Benchmark TTF day-ahead prices were briefly negative earlier this week, thanks to warm weather and full European storage.
The OBR has mimicked market mispricing of interest rates, pencilling a peak of 5pc next year and then a plateau lasting through to 2024 at a level a full three percentage points higher than earlier assumed. This implausible assumption has large implications for the interest payments on the Bank of England’s QE portfolio. Each 1pp rise costs the Treasury well over £20bn a year.
The forecast flies in the face of clear signals from the Bank that no such rate rises are coming. The OBR gives too little weight to powerful disinflationary forces building in the global economy. It is just as likely that those three percentage points will evaporate by 2024, conjuring £60bn of fiscal headroom each year. The black hole was always make-believe.
Our situation is desperate but not serious, to borrow a Habsburg motto. Loose money will to some degree offset the effects of tighter fiscal policy. That will cushion the housing slump and help to keep highly-indebted firms afloat.
But the tax-take will rise to the highest share of GDP since total mobilisation during the Second World War. Britain has missed its chance for an investment revolution that smashes through the productivity barrier. We will be an ordinary country with an ordinary government.
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