Autumn statement’s return to fiscal discipline is fraught with uncertainty

Despite fears of 2010s austerity redux, fiscal consolidation in Thursday’s autumn statement was more evenly balanced between tax rises and spending restraint. That said, the announced cuts will not kick in until after the next general election. Given recent months of political, economic and financial turmoil, the approach has been cautiously welcomed, but will it be enough?

Stability in public finances was broadly delivered but whether it also delivers sustainability remains to be seen. By extending the time horizon to achieve his new fiscal rules to five years, the chancellor has effectively allowed for future investment spending and capital budgets to be targeted for cost savings. Neither will be good for longer term growth.

Although public spending is set to rise by 1% in real terms starting in 2025, public services are in a much more fragile position now than in 2010. The freezing of capital spending in cash terms, particularly in areas outside of health and social care, is likely to be counterproductive, reducing productivity or increasing pressure on other public services, as identified in our performance tracker report.

Struggling to make ends meet

Local authorities will still be struggling to make ends meet after the autumn statement. While their funding may not have been cut, it will have been significantly eroded away because of inflation and will not stretch nearly as far as it would have when the spending review took place a year ago.

Without throwing caution to the wind, the government should come to recognise that addressing today’s cost of living crisis need not come at the expense of securing future economic growth

The increase in the national living wage is good for workers delivering vital public services but will need to be paid for from councils’ already stretched budgets. Indeed, the ability to raise council tax by up to 5% is a double-edged sword – local authorities know people are already struggling with the cost-of-living crisis and will be reluctant to add to this burden.

The outlook for economic growth is far worse than previously expected. Not only has the Office for Budget Responsibility confirmed the official start of a recession, but the UK remains the only G7 economy not to have recovered to its pre-pandemic GDP level. Headwinds from Brexit, the covid pandemic and war in Ukraine have converged to create the perfect storm that will batter the UK for years to come. Earlier this month, the Bank of England foretold how the UK could remain in recession until mid-2024, the longest period on record.

Living standards won’t be helped by a collapse in real wages and deterioration in labour market conditions. The unemployment rate is expected to peak near 5% in 2024 and falling participation rates due to factors such as long covid or early retirement will further exacerbate staff shortages across a swathe of public services. Fiscal drag, in the form of income tax thresholds left unchanged until 2028, will help to fill the public coffers at the expense of working households.

Coping with a black swan event

With taxes on capital gains and dividends also set to change, the announcements will leave most people with less money. The government’s phased withdrawal of energy bill support next spring is likely to be premature, while even the more targeted grants to low-income households will be reduced by a third to ￡900, taking average real disposable incomes to their lowest level in a decade. The uprating of welfare benefits will be insufficient to counteract this hit.

The biggest risk for Rishi Sunak and his chancellor is another adverse shock. How would government cope with the emergence of a black swan event such as a geopolitical conflict, bioterrorism or populist-led upheaval? Not very well, probably.

Re-establishing credibility in the UK’s public finances has helped to further reduce the risk premium associated with the now largely reversed mini budget. The new chancellor went to great lengths to ensure that there would be very little to unnerve financial markets – drip feeding most of the announcements in advance helped to sense check the policies in what has become an increasingly febrile political environment.

Without throwing caution to the wind, the government should come to recognise that addressing today’s cost of living crisis need not come at the expense of securing future economic growth.

Bolstering productivity by delivering the ‘world class public services’ it promised in its 2019 manifesto has the potential to create a Great Britain we can all be proud of.

* This article was published in the Local Government Chronicle on 21 November 2022.