Jeremy Hunt likes to present himself as being very upbeat. “The declinists are wrong,” he said at the end of his Budget, “and the optimists are right.” That’s the overall message. Rishi Sunak is succeeding at reducing inflation and debt and stimulating growth. The Conservatives are once again the steady-handed stewards of the economy, not the crazed drunken captains of the Titanic they appeared during the Liz Truss administration.
It was quite easy to be drawn into this fantasy while listening to his statement. Hunt always seems fairly reasonable and good-tempered. The Government would fight for growth by sustained policy intervention, particularly with a £4.1 billion move to provide 30 free hours of childcare a week for all children over the age of nine months, thereby freeing up parents to go back to work.
But there is a new tradition with Budgets, which started in 2010. We start with the aspirational poetry of the chancellor. Then, when he sits down, we read the mortifying prose of the Office for Budget Responsibility (OBR) economic and fiscal outlook report. And the bleak reality of our predicament stares us in the face.
It’s been this way since the OBR was established by George Osborne in 2010. There’s rarely been anything heartening in the document since the organisation was born, because the post-financial crash story of Britain is one of stasis, confusion, sporadic bursts of mania and perpetual decline. We were battered by the crash, then stagnated, then experienced a period of frenzied political volatility triggered by Brexit, then were hit by a succession of external shocks in the form of Covid and Ukraine, and then, in a final coup-de-grace, we detonated our own economy under Truss.
Hunt no longer wants us to mention this decline, because it is not politically convenient. So instead he has stitched together a positive narrative from the meagre fibres available to him.
Inflation peaked at 11.1 per cent in October and is expected to fall to 2.9 per cent by the end of the year. The economic downturn will be shorter and shallower than expected. But the underlying structural problems of the British economy have not disappeared. And the brute impact on people’s lives has not gone away either.
Real household income, the best gauge of actual living standards, will fall by 5.7 per cent in the two year period between 2022 and 2024. It’s the largest fall since records began in 1956-7. Real living standards in 2027-28 will still be 0.4 per cent lower than they were before the pandemic. It is a vision of hopelessness – a glimpse into the long-term wretchedness we truly face.
The underlying failures that contribute to these national decline are investment, labour market participation and productivity. Business investment has stagnated since 2016, because of the Brexit vote. It would have almost certainly recovered if a close relationship with Europe had been quickly established, but instead we experienced a period of prolonged uncertainty and chaos followed by a distant one. Who invests when they cannot guarantee the environment into which they are doing so?
Hunt plans to address this with full capital expensing, which allows firms to deduct investment spending from profits and therefore pay less tax. But it’s only in place for the next three years, meaning that if anything it’ll provide a quick sugar rush without sustained investment to follow. It’s a decent move, but one in which the usual policy zig-zags are evident – lack of long-term planning potential, lack of sustained policy-making, lack of certainty.
Labour market participation has fallen dramatically since the pandemic. Some of this is from well off older workers figuring they might as well retire and some from the long-term sick. Hunt tried to address it with the childcare announcement and reform of disability work arrangements. But he is unlikely to be successful.
Productivity has grown at less than half its pre-financial crisis rate since 2010, and the problem has now been compounded by the pandemic and soaring energy costs. It is the great puzzle-horror of the British economy, connected to lack of investment, regional disparity and sluggish growth. There are no answers from what we heard from the Chancellor today.
These are the rotten foundations upon which Hunt wants to build his house of optimism. “Gas prices remain more than twice their pre-pandemic level,” the OBR says, “which, when added to the stagnation in business investment since 2016, the recent rise in labour market inactivity, and the slowdown in productivity growth since the financial crisis, means that there remains weak underlying momentum.”
Hunt put the best possible face on a terrible situation today. But his smile is nervous and tentative. When it breaks, you can see his private recognition of the disaster we face. Some of that is, as Hunt likes to insist, a result of external factors. But much of it is to do with the decisions his party has taken and the ones it has not.