How the Chancellor laid hidden traps for Labour

Pushing the bulk of budget cuts back beyond 2025 will give any successor a headache, finds Tom Rees

The mañana budget is how Jeremy Hunt’s Autumn Statement has been labelled in the City: the Chancellor’s £55bn of belt-tightening is heavily back loaded to “tomorrow” when Hunt is hoping there will be brighter economic forecasts and more tranquil markets.

“He’s decided largely to allow borrowing to rise and to put off the tough decisions for another couple of years,” says Paul Johnson, director of the Institute for Fiscal Studies.

“He may well hope that things will look better by then or perhaps that it will be somebody else’s problem.”

As things stand, it is potentially a trap laid for Rachel Reeves, the shadow chancellor, with Labour’s 20-point plus lead in the polls seemingly putting Sir Keir Starmer on the cusp of power.

Unless the economic headwinds battering the public finances ease, or the political weather changes, it means Reeves, rather than Hunt, will be forced to deliver the bulk of the fiscal consolidation facing the country. If the shadow chancellor does inherit as dismal an economic situation as forecast, and does not want to push through more austerity, she would have to ramp up taxes to a record level.

“Those post-election spending plans are really pretty austere,” says Johnson. “That’s a pretty nasty place to be: high borrowing, high debt, high tax and public spending under strain.”

Of the £55bn Hunt wants to save by 2027-28, just £10bn is found by 2024-25, before rising to £26bn, £41bn and £55bn in the three years after the next general election is due. Almost all of the cuts to day-to-day spending and investment are to be delivered after 2025.

“Beyond the next two years, all the spending numbers should be taken with a very large pinch of salt,” says Johnson. “It’s unlikely that they will actually be kept to. I’d be willing to wager quite a considerable sum that spending will turn out higher than planned. It always does.”

This would mean either more tax rises or higher borrowing if the Office for Budget Responsibility’s forecasts are right. The experience of the Truss-Kwarteng mini-Budget market chaos offers a cautionary tale of what happens when leaning too much on borrowing to fund measures.

It is not just a case of the Chancellor playing dirty politics, however. There are very good economic reasons for Hunt delaying any spending restraints and increase in the tax burden. A significant belt-tightening today, at a time when the economy is heading into recession, risks making the downturn and fiscal hole even bigger.

However, critics say that previous decisions, including the widespread freezing of tax thresholds and increase in corporation tax to 25pc, will still weigh heavily on growth, raking in more than £20bn for the Exchequer next year.

And the economic backdrop that underpins the fiscal forecasts could change significantly, meaning a Reeves-led Treasury either can ditch the fiscal tightening or be forced to deliver even bigger restraints. For example, interest rates just 0.4 percentage points higher or lower than forecast would be enough to either wipe out or double the £9bn fiscal headroom Hunt has left himself, according to the OBR.

Paul Dales, chief UK economist at Capital Economics, says: “The public finances are very, very sensitive to changes in nominal GDP growth, but also inflation and interest rates.

“If the OBR saw signs that the economy wasn’t going to be as weak and growth was going to be stronger, that would suddenly give the Chancellor, whoever it is, much more money to play with, and vice versa.”

Austerity would be a tricky start to any chancellor’s time in No11, never mind a Labour one.

“The battle for Labour if they take over becomes: do you continue the shape of the savings that Hunt set out or do you put more weighting on tax rises,” says Andrew Goodwin, chief UK economist at Oxford Economics.

“They would dearly like to inherit something in a better shape.”

Economists believe Reeves would prefer to shift the balance of fiscal consolidation further towards tax rises rather than spending cuts.

Reeves said last Friday that “fairer choices around tax could have been made”, adding that Labour would have made “different choices to ease the burden on ordinary people”.

Simon French, chief economist at Panmure Gordon, says: “You could be relatively confident that ratio, 50-50, would probably skew more to 80-20 in favour of tax increases over spending cuts [under Labour].

“You can think of the things Labour are talking about. You’d imagine the conversation about a mansion tax would come back into the equation.”

Shifting the balance further towards taxes rises over spending cuts – currently a 55-45 split under Hunt’s plans – may not be as easy to pull off.

Analysis by Oxford Economics of previous belt-tightening by governments suggests that a 60-40 split towards spending cuts is the most successful balance. Tipping the process towards tax rises is more likely to fail or be reversed and have more damaging economic effects, it found.

Without a transformation, Reeves will face the same difficult decisions that confront the current Chancellor.

‘Beyond the next two years, all the spending numbers should be taken with a very large pinch of salt’