Hunt must avoid flip-flopping and stay the course on public borrowing

As long as state spending and inflation remain elevated, there is little, if any, room for cutting taxes

‘The Chancellor has little option but to soldier on with the fiscal thumbscrew he outlined in the autumn’

People are not idiots, Rishi Sunak said last week. Anyone could see why the Prime Minister couldn’t cut taxes, with public debt approaching 100pc of GDP and inflation still in double digits.

Yet it hasn’t stopped the “idiots” of his own party from calling for just such a tax-cutting agenda.

It is as if the lessons of Liz Truss’s short-lived premiership have already been forgotten.

Admittedly, thanks to falling energy costs, the economy is looking better than it was. It may even escape a recession, offering hope that Jeremy Hunt, the Chancellor, might indeed soon be able to start chipping away at Britain’s record high tax burden – perhaps as soon as March’s Budget.

Sorry to disappoint, but time for a reality check. New estimates this week provide further evidence that the UK’S fiscal position is still deteriorating at pace. Public sector net borrowing in December came in at an eye-popping £27.4bn, the highest December deficit since monthly records began. The latest survey of business sentiment, moreover, has somewhat dampened hopes of avoiding a recession.

We can argue about the make-up of the tax burden, which doesn’t obviously look conducive to the higher levels of business investment the economy so desperately needs. Yet as long as public spending remains where it is, there is little, if any, room for cutting its overall level.

Truss tried that game, in the hope that tax cuts would pay for themselves, and she very nearly bankrupted the country. It turns out that we are nowhere near that point on the Laffer curve where tax cutting is selffinancing – not that this was exactly hard to figure out in the first place.

For now, then, Hunt has little option but to soldier on with the fiscal thumbscrew he outlined in the Autumn Statement, regardless of how damaging this might be to the Tory party’s already diminished chances of survival at the next election.

It’s possible that by this time next year, a little more headroom may have opened up, but by then it may already be too late. Hunt’s unfortunate public duty is that of cleaning up the garden ready for Labour to mess things up all over again, much as occurred in the dying days of John Major’s administration in the mid-1990s.

Part of the job of leaving things in reasonable order is to re-establish an environment in which enterprise and growth stand at least some chance of staging a comeback.

This is going to be a struggle, regardless of the tax burden. Whatever the Chancellor does, demographic trends alone may doom him to failure.

For a glimpse of Britain’s future, look to Japan, which is in the vanguard of the ageing phenomenon. The Japanese economy is structurally very different from the UK, but nobody can escape demographics, and as populations stop growing and start ageing, it naturally dampens economic growth whatever is done to avoid it.

Fumio Kishida, the Japanese prime minister, pledged this week to take urgent steps to tackle the country’s declining birth rate, saying it was “now or never” for one of the world’s oldest societies. “Our nation is on the cusp of whether it can maintain its societal functions,” he lamented in almost apocalyptic terms.

Britain is less averse to immigration than Japan, which puts it in a slightly better position, but in terms of the overall demographics, we are not so far behind. As more people reach their dotage, the effect on the economy is depressingly similar: declining levels of consumer spending and increased pressure on public services.

Nearly two thirds of the UK economy is accounted for by household consumption; so maintaining overall growth against a backdrop of structural, age-related declines in consumption will therefore be particularly challenging.

“I believe that Britain’s best days lie ahead of it.” This is the sort of platitude that politicians feel obliged to constantly parrot, and we must of course try to remain optimistic. But whether genuinely believed or not, it is hard to square with the evidence of Japan and other ageing societies.

Hunt will this week embark on a series of lectures on the economy, beginning with one at Bloomberg centred on the opportunities in digital tech, including artificial intelligence. As it happens, AI does potentially offer solutions to the difficulties of ageing populations, but that’s a subject for another column.

As Hunt is only too aware, there are unfortunately much more immediately pressing challenges than how to win leadership in AI. First is that of getting on top of inflation. You do not do this via the fiscal giveaway of tax cuts.

From the damage being inflicted on the public finances by high debt servicing costs to today’s destructive outbreak of strike action, the cost of living crisis and exceptionally poor levels of business investment, high inflation lies behind so many of the problems the economy is facing.

Even if it means monetary overkill, it must be tamed. Having failed at prevention, the Bank of England should not be making the mistake of having to fight this battle twice. It must succeed in the first push.

Poor levels of labour market participation following the pandemic also need urgently addressing, as well as the destructive influence of mass, middle class, home working.

Culturally, we seem to have fallen prey to the idea that the world owes us a living. A once admirable work ethic has given way to an overriding sense of entitlement and rights. It may require a much greater crisis than we see now to finally bring the nation to its senses.

Third, energy security needs to be made an urgent first-order priority. This is not necessarily in conflict with the green transition, but it does require a more realistic approach to net-zero targets. There is no prospect of enhanced growth, investment and cutting edge digital technology if you cannot guarantee to keep the lights on.

And finally, there is the business opportunity of the green transition itself. Team Truss may have been fiscally illiterate, but it had some of the right ideas about growth. We cannot and should not try to compete with the US and Europe on green subsidies. These programmes are in truth little more than simple protectionism masquerading as saving the planet.

But as Tony Danker, directorgeneral of the CBI, proposed this week, targeted state support for precommercial green technologies such as hydrogen and carbon capture, where Britain could gain a lead, would be a perfectly acceptable way forward.

Much more important, however, is the removal of myriad planning and other regulatory constraints that stand in the way and threaten to leave the UK behind in the race to carbon neutrality.

Britain is not yet an economic basket case; but regardless of who’s in power, without urgent action, it soon will be.