From growth to near austerity in just 12 months
year ago, Rishi Sunak, then chancellor, announced an Autumn Budget and spending review in which “every department’s overall spending will increase in real terms …. and total departmental spending is set to grow in real terms at 3.8 per cent a year on average over this Parliament”.
Mr Sunak had added: “This is the largest real-terms increase in overall departmental spending for any Parliament this century.”
This was to be a definitive sign of a return to better times, a new beginning for public services.
Now, as Prime Minister, he oversees an Autumn Statement that teeters on the edge of a new period of austerity.
With inflation way above target, the Office for Budget Responsibility (OBR) anticipates the day-to-day budgets of non protected public services will now experience a fall, in real terms, of almost 1 per cent a year between 2021/22 and 2024/25.
At the time of the spending review last year, this was intended to be a real terms rise of three-and-a-half per cent a year.
It is a dramatic turn-around and appears to be thought of as the least bad choice by Jeremy Hunt, given the various pressures he was facing.
His gamble is that offering some help to households to meet rising costs is the best way to spend what money he has.
So benefits rise in line with inflation and there is help with energy bills.
Even then the OBR estimates that living standards – as measured by real household disposable income per person – will fall by 7 per cent from 2021/22 to 2023/24.
This comprises the two larga
est annual falls since records began. But it could have been worse. Without the government support the fall would have exceeded 10 per cent.
To be fair, Chancellor Jeremy Hunt was severely boxed in. As a result of the Liz Truss/ Kwasi Kwarteng debacle, the Autumn Statement was partly designed so the OBR could show there was a way forward to, if not sunny uplands, then at least stability.
Hence, after a couple more horrendous years with a mixture of very high inflation, an economic recession and falling living standards, the economy emerges in 2025 and beyond with good growth, inflation slain – negative even – and living standards seeing solid and sustained gains.
Iwon’tgointoalltheassumptions this scenario is conditional on, as there just isn’t the space.
Suffice to say that such an optimistic medium-term outcome is very much dependent on the world going back to “normal”.
No more wars in Europe, no more global pandemics, no more financial meltdowns. None of these things can be taken for granted.
Even if such a rosy future were to arrive, this can still be
seen as a muddling-through budget, a catching your breath while the enormity of the task sinks in budget. More difficult decisions await.
On spending, the Chancellor does not realistically have the option of big departmental cuts à la George Osbourne.
There just isn’t the scope any more without a fundamental change in what services from the likes of local government and law and order provide.
And already he is pushing up against the publics limits of acceptance.
On taxes, there has been a further increase in the tax burden that Ms Truss was so determined to reverse.
It is now on course to reach its highest sustained level since the Second World War. This, remember, at a time when public services are being cut back, again, and when public sector strikes could lead to wage settlements way above current spending plans.
Nor will pressure for higher taxes ease. The future holds in store a variety of funding challenges, including: demographics working against us; rising social care costs still to be addressed; extensive legal system and health waiting lists; defence spending on the rise post Ukraine, and infrastructure investment shortfalls which risk the country missing out on a revival in economic growth and levelling up.
You can also feed in the changes that should be made inlightofcovidtoensurethere is more resilience in the system and that “vital”, but lowpaid jobs are better rewarded.
This all points in one direction – higher taxes. The only counter would be from a return in productivity growth, but the OBR don’t foresee that as part of their forecasts.
For now Mr Hunt has judged that offering some protection over cost-of-living pressures is the top priority.
But it doesn’t offer much of a future for public services that now appear destined to slowly deteriorate rather than to turn around.
Even if some relief comes from a winding down of the war and falling prices and interest rates, the basic dilemma will remain – how to improve, or even maintain, public services without further raising the, already historically high, level of taxes.
This puts the Tory party-led UK Government in a bind as its low tax natural preferences violently clash against the harsh reality of the current circumstances that require higher taxes.
There is only one sensible way to go, but as the recent experiment with Ms Truss shows, there is no guarantee that sense will prevail.
Meanwhile, tucked away in the OBR’S economic and fiscal outlook, we find that oil and gas revenues are now forecast to rise to above £20 billion, at least temporarily.
This is the highest ever annual figure and the highest as a share of GDP since 1985/86. It may not be very environmentally friendly, but it must be tempting for the SNP to see that as a silver lining amidst the dark clouds.