The painful double by-election defeat underlines the challenges facing the government, as it prepares for the Autumn Statement next month and a general election next year.
Voter discontent, at least as far as the economy goes, is obvious amid pressure on incomes from an almighty tax squeeze, two years of rising prices, resurging fuel prices, costly mortgages and an uncertain outlook for house prices, jobs and growth. No wonder consumers are reluctant to spend, as evidenced in the latest retail volume sales figures, which fell 0.9 per cent in September. Many analysts suspect there will be further weakening in the coming quarters, with the lagged effect of the Bank of England’s (BoE) rate hikes playing their part.
It’s not a backdrop any chancellor would wish for. And the most recent economic data releases will have done little to help extract Jeremy Hunt from the tight corner he finds himself in.
Although public finance numbers in September were better than expected, with the month’s borrowing coming in at £14.5bn, well below the Office for Budget Responsibility’s (OBR) predicted £20.5bn, the national debt remains close to 100 per cent of GDP. The interest bill is colossal, and Hunt warned recently that interest payments will balloon by a further £20bn to £30bn. We are not growing ourselves out of this problem: GDP growth is subdued, increasing by a whisker at 0.2 per cent in August.
Nor can Hunt rely on the BoE to get him out of hot water. There is scant hope of a change to the higher-rates-for-longer policy while the Bank remains concerned about wage growth – still a problematic 8.1 per cent in the three months to August – and the fact that inflation stayed high in September at 6.7 per cent, and services inflation rose from 6.8 to 6.9 per cent. And of course, there are new risks the conflict in the Middle East will spark an energy crisis.
Governor Andrew Bailey has signalled that despite economic weakness and consumer gloom, the bank has no intention of relaxing its stance on rates. The expectation is that the Bank will not hike again next week. However, the slow-paced loosening of Britain’s job markets won’t advance the timing of cuts. Companies may be ditching their post-Covid-19 habit of retaining workforces, but unemployment numbers are estimated to have stayed flat at 4.2 per cent in the three months to August. Benjamin Nabarro at Citi expects this to increase to 5.8 per cent but not until the end of 2024. Elsewhere, the picture should brighten somewhat next month, with inflation predicted to fall to just 4.6 per cent in October and keep falling thereafter.
So could there be room for manoeuvre in the revelations that the tax flows are at record levels? Joe Neal at Blick Rothenberg points out that income tax take has increased 12.5 per cent this year compared with average pay growth of 8 per cent in the private sector and 6.8 per cent in the public sector, as people were pushed into higher tax bands. It will all add up to a whopping extra £52bn a year for the Treasury by 2027/28 according to the Institute of Fiscal Studies. Tax cuts are the straw that some of Hunt’s colleagues are hoping could reverse the situation at the polls.
However, Hunt has remained adamant that there is no room for this, which in any case would add to the inflationary fire. Hunt’s consistent message has been around sparking growth, halving inflation (to create the right climate for growth) and getting debt down. He has flagged the OBR’s long-termforecast for public spending growth of2 per cent a year against an economic growth rate of 1.6 per cent, which would cement a pattern of high borrowing.
Instead, Hunt’s instincts will be telling him to cut spending. Any giveaways or revelations will likely be linked to the other story of his tenure – London’s capital market’s crisis – and any juicy tax cuts will have to wait until closer to the election.
