Jupiter Merlin Weekly: Hunt’s budget pleases hardly anyone

Jeremy Hunt, the Chancellor, has just pulled off quite an amazing feat: in an election year, in his final Budget before we all troop into the polling booths (there may yet be an Autumn Statement; who knows) and with one last roll of the dice he has managed the extraordinary achievement of pleasing hardly anyone and leaving almost everyone dissatisfied. The centrepiece, the 2p reduction in the National Insurance levy, was supposed to be the flagship policy appealing to the faithful that the Tories really are a party committed to tax cuts. To the waverers, it was an electoral bung of no greater subtlety than “here is £764, now please vote for us”.

You can’t fool all of the people all of the time

Aimed at “hard working families” it immediately ostracised the pensioners (though they have so far had protected status from which they have benefited during the inflationary hump thanks to the preservation of the Triple Lock; of course, in the last Autumn Statement there was the abolition of the lifetime allowance cap, though Labour have said they will reverse it if they gain office, and it is of no benefit to current pensioners); among those “hard working families”, higher earners are left financially worse off through the pernicious effect of frozen income tax allowances more than offsetting the NI reduction, similarly lower-income earners see no benefit. Middle income earners on the face of it are better off but are still left with that feeling of being done over: for the rail commuters, in the same week the Chancellor reduced their NI contributions, the cost of going to work has just risen by more than the current rate of inflation. Government regulated season tickets have gone up by 5.6% (as an example of the near perfect symmetry of what the Lord giveth, the Lord taketh away again, the annualised cost of a 70 minute commute from Grantham to Kings Cross with the government-owned LNER train operator has just gone up by £728, almost exactly the equivalent of the £764 saving from the NI reduction: now you see it, now you don’t!); further, with the dire straits in which most local councils find themselves, and the latest survey estimates that 10% of all English councils will go bust this year, Middle England has a shrewd idea that a chunk of the benefit from NI will be lost through big hikes in Council Tax. As for the Byzantine and virtually incomprehensible system of child benefit and Universal Credit that leaves some middle income families on a marginal rate of tax approaching 90%, they will think the Chancellor’s tax-cutting assertion as some kind of warped joke.

Intelligence is no bar to stupidity

When people can work out for themselves that there is little or no discernible benefit, and the Office for Budget Responsibility (OBR) and the independent Institute for Fiscal Studies (IFS) both demonstrate that the overall tax burden is still rising, it is plain daft to try and persuade the electorate that it is being served a tax cut. But the political charlatanism is not the sole preserve of the Chancellor. Barely a handful of days before the Budget, Rishi Sunak headed to Aberdeen to reaffirm the government’s commitment to the oil sector; he told industry workers how fantastically important they are to the UK’s energy security, maintaining the ability to keep us moving and the lights burning, all the while knowing full well that despite oil sector profits having declined from their peak, with Sunak’s clear endorsement the Chancellor was going to re-emphasise the windfall supertax levied on energy companies.

It is a deceit; it is bad politics; in the end, the Tories will pay at the ballot box.

When a safe pair of hands means doing nothing

Back in October 2022 when the brief but hyper-eventful period of Liz Truss’s administration was rapidly reaching its nemesis, in these columns we suggested that if Jeremy Hunt was the solution, the problem was bigger than we knew. Feted by the markets as safe hands, he and Rishi Sunak would stabilise the ship. They did. Calm was restored. Sterling recovered some of its losses, the risk-premium spread on UK Gilts abated. But we said too that the likelihood of Hunt really grasping the nettle of the UK’s public sector borrowing requirement and repairing the over-stretched balance sheet, laying the firm foundation for a match-fit, competitive and growing economy was virtually nil. As the longest-serving Health Secretary in history and his demonstrable failure to make any meaningful reform meaning he left his department in an even worse state than he found it was ample evidence that no wider public sector reform would be achievable when he became Chancellor. Despite 17 months in office, his has been a gutless performance. Despite his pleadings for “eye-wateringly difficult choices” to be confronted, his natural political reaction has been to defer every single one until after the election. He has lived down to our lowest expectations.

When a safe pair of hands means doing nothing

Back in October 2022 when the brief but hyper-eventful period of Liz Truss’s administration was rapidly reaching its nemesis, in these columns we suggested that if Jeremy Hunt was the solution, the problem was bigger than we knew. Feted by the markets as safe hands, he and Rishi Sunak would stabilise the ship. They did. Calm was restored. Sterling recovered some of its losses, the risk-premium spread on UK Gilts abated. But we said too that the likelihood of Hunt really grasping the nettle of the UK’s public sector borrowing requirement and repairing the over-stretched balance sheet, laying the firm foundation for a match-fit, competitive and growing economy was virtually nil. As the longest-serving Health Secretary in history and his demonstrable failure to make any meaningful reform meaning he left his department in an even worse state than he found it was ample evidence that no wider public sector reform would be achievable when he became Chancellor. Despite 17 months in office, his has been a gutless performance. Despite his pleadings for “eye-wateringly difficult choices” to be confronted, his natural political reaction has been to defer every single one until after the election. He has lived down to our lowest expectations.

Richard Hughes, head of the OBR: “the government has no spending plan”

The invention of George Osborne to “keep politicians honest about the economy”, the quango that is the Office for Budget Responsibility is simultaneously a whipping boy and a political fig leaf for politicians to hide behind. When the government strays from the orthodox consensus or fails to consult the economic Delphic Oracle (as was the case with Liz Truss and Kwasi Kwarteng) the OBR is held up as the immutable pillar of fiscal responsibility and reference. In fact, its economists are no better or worse than any other: their models are just as fallible, but the difference is that theirs are the final arbiter of budget responsibility. But among those who see the solution to the economic problem as throwing money at it, the OBR becomes a significant constraint, especially when it comes to government borrowings and debt limits. “Abolish the OBR!” has become a regular refrain among such constituencies.

There is a precedent for the pragmatic notion that if the targets are unachievable, then change the targets. As we described in these columns before Christmas, the eurozone has done exactly that in relaxing the upper limits for national debt/GDP and government deficit/GDP ratios. But fundamentally, moving the goalposts does not make the underlying problem of achieving fiscal prudence go away.

The OBR does not see the government debt burden subsiding this side of 2028. But as Amol Rajan asserted the morning after the Budget on the Today Programme to Richard Hughes, head of the OBR, the official economic forecasts are a work of fiction. And why? Because Hughes very publicly blew the gaffe on Hunt’s fiscal plan: there isn’t one. As he admitted, the OBR knows what the tax plan is, but there is no medium term department-by-department spending plan emanating from the Treasury. It simply does not exist. And that, dear reader, is the sum economic policy activity of the safe hands who have been in office for a year-and-a-half: some half-baked, cooked-up, superficial tax cuts and no shred of evidence of any fiscal plan, let alone any thought for the full-scale public sector reform that is so clearly required.

A policy desert and a wasted opportunity

Painful to say, the Tories today are a busted flush when it comes to original thinking; Tory economic policy is largely an empty vessel. Whether you agreed with their policies or not, back in 1979, robust and fearless leadership was provided by Margaret Thatcher and Nigel Lawson, underpinned by the deep intellectual rigour of Keith Joseph and Alan Walters. They were in no doubt about a clear and firm path for recovery after the depressing drift to mediocrity, lifting us from the economic doom-loop of the 1970s. Today, despite the stunning opportunity afforded by Brexit, the economic nirvana promised by Boris of those economic “sunlit uplands” is being squandered by featherlight political technocrats.

It’s not as though the alternative is visibly better

The alternative is Labour. The performance of Keir Starmer and his Shadow Chancellor, Rachel Reeves gives no cause for optimism. A former Bank of England economist and with the dubious endorsement of the Bank of England’s erstwhile Governor Mark Carney, Reeves’s credibility for fiscal prudence is already under suspicion. Admitting she had got her sums wrong to the tune of £115bn in her £140bn “Securonomics” plan to “green” the economy (by her own admission, she had failed to account for the rising cost of borrowings as bond yields and interest rates rose in response to inflation), she had to execute a rapid and humiliating U-turn. Starmer’s response to the Budget also showed what little grip he has on the basics of economics and the difference between monetary and fiscal policy. Accusing the government of delivering an economy with no growth, he demonstrated his lack of understanding that raising interest rates to curb consumption and slow the demand side of the economy was a pre-requisite to get inflation back under control. He regularly berates the government as being responsible for high interest rates when monetary policy is the sole preserve of the independent central bank; he seems to believe that the UK economy operates in a vacuum, cut off from the rest of the world, that we are the only economy with high borrowing costs. It might make for good knock-about point-scoring at the Dispatch Box, but what it reveals in lack of understanding of fundamental principles is depressing.

Real consequences of a half-formed strategy

To be clear, when drawing the parallels between the Thatcher era and Sunak’s, the situation is different. Today’s is not the acute economic crisis of half a century ago. We are not in that immediate doom-loop to economic perdition which led us to the cold embrace of the IMF and needing to be bailed out as in 1976. Instead we are in the insidious grip of lazy, Keynesian consensus thinking, plodding along in nominal terms but more-or-less accepting relative decline as inevitable. It should not be.

The situation in which public sector outcomes increasingly fail to match public sector spending and investment is pernicious. Waste and inefficiency are prodigious; the tax burden, the debt/GDP ratio and the enduring deficits are up against the stops; yet there is no plan. But there are real consequences: as the IFS pointed out, finding £10bn to fund the equivalent sum in tax cuts but foregoing £10bn of expenditure on defence was a “political choice”. But when Hunt then rows back on the commitment to allocate 2.5% of GDP to defence by the end of the decade, saying now that it will only be met when “economic conditions allow”, his playing fast and loose with defence policy in the face of a very real military threat is both reckless and negligent.

When public sector spending is clearly defined, tightly targeted, robustly controlled and delivering on expectations, governments have options. Left to political chancers when already on the ropes, invariably the wrong decisions are made. That is essentially where we are today. As for the future under a likely Labour government, on the current evidence there is no cause for any greater optimism.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each.  With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.