Jupiter Merlin Weekly: A study in failure
The Jupiter Merlin team dissect the Chancellor’s Autumn Statement, which pushed many of the hardest decisions out into the future, while piling on tax in the meantime.
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Playing politics with the economy, Hunt has tried to be too clever by half. Public spending already approved will remain as planned for the next two years and then, far from falling in absolute terms overall, it will only grow at a slower rate. Previously planned increases in departmental spending will be scaled back and some may be cut but despite the £35bn of savings out to 2028, total government expenditure will rise, just less quickly; we will still borrow, just not as much.
For the truth is this was more a budget with a cynical eye on the 2024 election than any exercise in sound fiscal probity. The Tories are trying to lay a trap for Labour: Hunt talks a good game (those ‘eye-watering choices’ etc repeated ad nauseam) but in delaying public expenditure constraints by two years he will be able to claim the Conservatives have maintained public services while trying to manage overall debt burdens, the shortfall paid for by £24bn of extra taxes. If the government finances are still in a mess, then it will be Labour’s problem to solve with all the political consequences involved.
But Hunt cannot have it both ways. The problems cannot be so ‘eye-wateringly difficult’ that they only need addressing in two years’ time. And by fleecing middle and upper-income earners now, and raiding the coffers of energy companies and electricity generators, while deferring his responsibilities to act as a responsible steward of taxpayers’ money, he takes the electorate for fools.
Under normal circumstances this would have been a horror show as far as markets are concerned. But these are not normal times. After the Truss/Kwarteng car-crash ‘fiscal event’ of only six weeks ago, and the fact that Hunt had clearly warmed us up for what was on the agenda after already eviscerating virtually all of Kwarteng’s playlist, markets were pre-conditioned to a package of economic repression measures focused on companies and taxpayers. They were not disappointed.
And so we come down to taxation and government expenditure where on both counts the government’s response is depressing and debilitating.
The 45p tax rate for top earners has turned in to a political football (one wonders whether when he first introduced it, Gordon Brown knew he was laying a landmine for the Tories to trip on; even if not, Kwarteng subsequently detonated it). Not only was Liz Truss’s planned abolition of the 45p top rate of tax reversed immediately after Kwarteng was sacked, but today in going even further and Hunt lowering the qualifying earnings level from £150,000 to £125,140 at which it applies, potentially an extra 250,000 people become liable for the highest rate of tax on top of the 630,000 who pay it already. Add to that the changes to dividend income and CGT reliefs, other tax bands being frozen for five years and hey presto! £24bn becomes available without the nominal taxation rate being touched. And away from central government, Hunt will allow local councils to increase Council Tax by up to 5% instead of 3%, further increasing the strain on household budgets.
But whatever the sleight of hand, the fiscal drag created by such a high and rising tax burden being applied in recessionary times in addition to simultaneously rising interest rates leaves the rational observer scratching one’s head as to whether in the past two months we have been transmogrified into citizens inhabiting a parallel universe.
This UK data and last week’s much better than expected US inflation news will inform the central bank policy committees’ debates in December about the future path of interest rates. Will it tilt the balance of power between the competing factions? The policy hawks who believe that to relax now would be a mistake, reducing the likelihood of returning the inflation rate to 2% and prolonging the time that growth in prices remains above target as wage inflation, a significant component, becomes embedded and endemic; the doves on the other hand see no reason to cripple the economy when the monetary tightening medicine is, as they see it, already having a demonstrable effect calming consumption pressures.
The way government bond yields have fallen in the week since the headline rate of US inflation fell to 7.7%, and ex-food-and-fuel core inflation fell too (the US 10-Year Treasury today yields 3.8% against 4.16% immediately prior to the US data release; Germany’s 10-Year Bond at 2.07% is down a quarter-point over the same period) is a case of markets signalling their own expectation that the central banks have had their fun, it’s now time to calm down and take a more moderate approach. Nothing is cast in stone here. We will know before Christmas how the land lies.
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