A dismal outlook for the UK economy

Chancellor Jeremy Hunt’s Autumn Statement was so diametrically opposite to the “mini” Budget of his predecessor Kwasi Kwarteng that it felt almost as if a different party had come to power. In eight weeks, Britain has swung from having the largest tax cuts in 50 years to the most austere package of revenue-raising and spending curbs for more than a decade. The market reaction suggests the £55bn belt-tightening, though backloaded, managed to placate investors. Yet even more eye-catching than the measures themselves was the dire outlook that necessitated them. Living standards are set for their biggest fall in six decades; the economy will regain its pre-pandemic level only by the end of 2024. Even if its finances are stabilised, Britain’s growth problems remain chronic.

The Conservative chancellor needed to do enough to convince markets he was serious about fiscal consolidation without scaring his own backbenchers by going too far. Restoring credibility came down to tone and presentation — convincing investors that Hunt and new premier Rishi Sunak are serious people. The rhetoric rightly emphasised support for the Bank of England’s inflation-fighting efforts and its independence, and respect for the fiscal watchdog, the Office for Budget Responsibility.

In substance, putting off the bulk of the tightening until 2025 and achieving almost half of it through tax rises makes political and economic sense. Spending cuts have a bigger drag on growth, and putting them off will help to cushion the recession that has already begun. The phasing confronts the Labour party with a dilemma over whether to commit to similar spending cuts in an election, which is likely to take place in 2024, and leaves room for economic realities to turn out less bleak than the forecasts.

With inflation hitting a 41-year high of 11.1 per cent in October, and interest rates still likely to move higher, UK households and businesses were in no position to stomach a large near-term fiscal tightening. Ensuring benefits and pensions rise in line with inflation, and levying tax from high earners and the wealthy, lightens the load on the vulnerable. Extending the energy support package, albeit on a less generous basis, alongside grants for the most needy, was a necessary step, too — even if the policy remains wasteful in its design.

Where the statement was badly lacking was in plans to boost potential growth. Plans to freeze capital spending after 2025 — meaning a big cut from what was previously planned — will take a serious toll. Little was announced to boost feeble business investment, which remains a significant drain on productivity. The government acknowledged the urgency of getting inactive workers back into a labour force still smaller than it was pre-pandemic, but fell short of devising policies.

The immediate reason why the chancellor had to announce tax rises and spending cuts was the inflation that was a legacy of the pandemic, turbocharged by Vladimir Putin’s war in Ukraine. But the situation was worsened by the damage to Britain’s credibility from Kwarteng and former premier Liz Truss’s unfunded tax-cut plans. Ultimately, the UK has arrived where it is through a self-reinforcing cycle of bad decision-making and anaemic growth, for which the Conservatives, in power for 12 years, must take much of the blame. That has to be acknowledged, as does the impact of a hard Brexit deal that piled up costs on business.

Now that the government has steadied the economic ship, it must develop a serious and credible plan to get Britain’s economy growing again. If it fails to do so, it will jettison whatever slim hope it may retain of winning the next election and leave Britain facing years of painful austerity and stagnation.

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The editorial board

By The editorial board

The Financial Times is one of the world’s leading news organisations, recognised internationally for its authority, integrity and accuracy. The FT Group employs more than 2300 people worldwide, including 700 journalists in 40 countries. It includes the Financial Times, FT Specialist, and a number of services and joint ventures.

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