Blaming the OBR for the straitjacket on our public finances is deluded
It was grim, but it could have been a lot worse. The Autumn Statement might, for instance, have been more punishing still had the Office for Budget Responsibility (OBR) opted to use the Bank of England’s even gloomier forecasts for the trajectory of Britain’s economy, rather than its own slightly more upbeat projections.
It would also have been worse had Jeremy Hunt, the Chancellor, stuck with the previous fiscal rule of having debt falling as a proportion of GDP by the third year of the forecast, rather than extending it to five years, a time horizon that pushes the required fiscal consolidation deep into the unknown mists of the next parliament.
And it might have been worse had Hunt erred on the side of caution, and given himself more room for error. As it is, he only just sneaks in under the bar, and this despite imposing £25bn of tax rises and a similar quantity of cuts to planned public spending.
Even so, the national debt surges to more than 100pc of GDP, its highest in 63 years, debt interest costs rise to their highest as a share of revenue since the immediate aftermath of the Second World War, and the tax burden reaches a new peacetime record.
If things turn out only slightly worse than the OBR expects, then even the new fiscal rule will not be met and further action will have to be taken. Still, with a heavy reliance on pretence and inflation to do the dirty work, the Chancellor has at least managed to steady the ship after the catastrophe of September’s mini-Budget.
It’s odd to see a Conservative Chancellor so casually accept the supposed need for further expansion to the frontiers of state spending. Yet, in that regard, even Tories seem to be socialists now and it might be argued that what he has done is both politically and economically smart.
Thanks largely to the energy support package, there is no net fiscal squeeze over the coming two years, but an actually quite significant giveaway, which is just as well – for to be squeezing while heading into the teeth of an expected year-long recession would have meant double the pain.
The Chancellor has avoided blunt austerity. Other choices on tax and spend could no doubt have been made. You can argue about whether indexing pensions and benefits is entirely wise given the state we are in, for it has meant deeper punishment still for the productive elements of the economy.
But, in terms of the broad envelope of fiscal policy, Hunt had little choice in the matter and, if anything, he has been gentler with the therapy than he should have been. Thanks to the energy crisis and the devastating legacy of Covid, the nation is simply a whole lot poorer than it was; Hunt has done no more than confront this grim reality.
Those who blame the OBR for imposing an unnecessary straitjacket on the public finances are deluding themselves. By definition, the OBR forecasts are almost bound to be wrong. Let us hope that it has over-egged the gloom.
All the same, the scenarios outlined are perfectly plausible ones and, if anything, are somewhat sunnier than you might expect. To coin a phrase, you cannot have your cake and eat it too, yet that was the thinking behind the kamikaze flight of Liz Truss’s short-lived government. Small wonder that the markets went on strike. She flew the public finances into the wall.
Not that there is any reason to celebrate the dog’s dinner of a salvage operation now under way. The freeze in income tax thresholds will raise the number of higher rate taxpayers from just 8pc of the total only a couple of years ago to 15pc in five years’ time, according to estimates by the Institute for Fiscal Studies. Back in 1990 it was 4pc. This tax band was not meant for ordinary middle-income earners, but huge numbers will now be paying it.
Fiscal consolidations are dispiriting affairs. By back-loading the pain – the St Augustine approach, as it is sometimes known, of “please make me chaste, but not yet” – Hunt has done his best to mitigate the immediate consequences of recession. But this has pretty much exhausted the demand-side levers that he has left to pull. There are, however, a lot of things that the Government could do on the supply side of the economy that, in time, would significantly boost potential growth. We might usefully start by patching things up with Europe, even if this means throwing Northern Ireland’s Democratic Unionist Party under the bus.
We are in the punishment phase of Brexit at present; even where trade should be relatively barrier free, Britain is being penalised by certain EU states, illegally in some cases.
Regardless of where the blame for these obstructions lies, increased barriers to trade are proving a big drag on the economy and need urgently addressing, even if it means a degree of compromise on sovereignty.
In an Autumn Statement that was otherwise devoid of the “vision thing”, Hunt spoke of turning Britain into a new Silicon Valley and talked fondly of us being a global leader in renewable energy. Yet, to be serious about either of these things requires root-andbranch reform of planning laws.
Nor do you turbocharge the energy transition by slapping a windfall profits tax on wind and solar farms, or by removing the excise duty exemption for electric cars.
As for financial services and
“Big Bang 2.0”, before becoming too excited about reform of Solvency II – which leaves most people cold in any case – we need first to be getting the basics right.
Bizarrely, the Bank of England’s Financial Policy Committee threatens to tighten counter-cyclical capital buffers for banks even as the parallel Monetary Policy Committee raises interest rates and the economy heads into recession. This will only compound the already apparent balance sheet contraction at big banks.
Similarly, with Basel III proposals for increasing risk-weighted capital requirements, few banks are able to raise more capital in today’s markets, so if the Prudential Regulatory Authority agrees to impose the new international standard, it will only further reduce lending capacity.
Third, the rules governing pension funds need reforming to allow more investment in equity.
And fourth, the extraordinarily costly, and entirely unnecessary, made-in-Britain experiment in “ring fencing” of retail banks, which involved putting UK domiciled banks at a significant competitive disadvantage to European and United States peers, should be scrapped.
I could go on, but space prevents. The OBR is often criticised for forecasts that limit policymakers’ freedom of action but, if anything, its soothsayers have, this time around, been rather more generous with their predictions than they might have been.
Growth will return to an above recent trend rate of 2.5pc from 2025 onwards under its current forecasts. One thing is sure; without the sort of measures just mentioned, there is very little chance of this particular prediction being met.
‘If anything, the OBR’s soothsayers have been rather more generous with their predictions than they might have been’