Rules are made to be broken – certainly for the occupants of 11 Downing Street. Even Jeremy Hunt, hired as Chancellor to restore a sense of order to the public finances, has managed to miss the Government’s fiscal targets by billions of pounds.
His solution? Change the rules so that he does meet them. The targets relate to the Government’s promises to cut debt and borrowing.
They matter because it is against these yardsticks that Chancellors make big decisions on how much more tax they need to extract from families and businesses, and how stingy they need to be with spending on public services.
Moving the goalposts: Chancellor Jeremy Hunt was on course to miss fiscal targets – so the Government pushed the deadlines out by two more years
Part of Hunt’s aim has been to reassure financial markets after predecessor Kwasi Kwarteng’s disastrous mini-Budget.
Kwarteng attempted the biggest round of tax cuts in 50 years. Hunt reversed most of them and has now gone even further with the biggest fiscal tightening – tax hikes and spending cuts – since 2010. Yet it was not enough to meet the fiscal targets that had been put in place.
The aim, in theory, had been to hit two key goals within three years: balance the books on day-to-day spending and get underlying debt falling.
Hunt was on course to miss those targets by £8.7billion and £11.4billion according to the Office for Budget Responsibility (OBR). So the Government pushed the deadlines out by two more years and widened the goalposts for borrowing, so that it only has to be cut to 3 per cent of GDP, not wiped out entirely.
On that basis, Hunt is on target to succeed with £18.6billion to spare in the case of borrowing and £9.2billion for debt.
It was, said the OBR’s chairman Richard Hughes, ‘probably close to being one of the laxest’ goals since fiscal targets first began to be set in the UK in the late 1990s.
But he added: ‘It’s also the case that meeting fiscal rules is pretty rare these days.
‘There’s only been one or two years in the last decade where fiscal rules were actually being met.You also have to take into account we’ve had a financial crisis, a pandemic and an energy crisis.
‘These are difficult environments to operate rules-based policies so you do have to also have some sympathy for the people who have to make the decisions necessary to try to meet these rules.’
Ironically, the mini-Budget in September was not found to have breached any rules – but only in the same way as a drunken motorist who refuses to take a breathalyser test.
Kwarteng found to his cost that sidestepping the judgment of the OBR provoked greater anxiety in financial markets than being found to have fallen short.
Hunt’s Autumn Statement has so far failed to provoke paroxysms in bond markets though sterling was marked down by more than a cent against the US dollar at one point after his speech.
Besides checking the Chancellor’s homework, the OBR laid out a sobering forecast for the economic path ahead, judging that the UK is already in recession and predicting that half a million jobs will be lost as unemployment rises over the next couple of years.
Borrowing, meanwhile, is set to soar to £177billion and the cost of just paying the interest on the Government’s debt pile will reach an eye-watering £120billion for the current fiscal year alone.
A freeze on income tax thresholds coupled with a squeeze on businesses will help to take the total UK tax burden to its highest sustained level since the Second World War.
Disposable incomes, eroded by inflation, are set to fall by 7 per cent over the next couple of years, wiping out the previous eight years of growth.
Yet economic forecasts are notoriously slippery and things could get better – or much worse. An end to the war in Ukraine could bring down energy prices, lower inflation and aid recovery.
But an escalation in the war, pushing gas prices back to their peak seen over the summer, could add a further £42billion to borrowing next year, while an additional interest rise of one percentage point would add around £25billion a year.
The picture for public spending looks grimmest from 2025, when Hunt’s plans see Government departments receiving £28billion a year less than previously planned.
Paul Johnson, director of the Institute for Fiscal Studies, said: ‘Delaying all of the difficult decisions until after the next general election does cast doubt on the credibility of these plans.
‘The tight spending plans post-2025, in particular, may stretch credulity.’
But he added that given the uncertainty of forecasts and the damage that cuts could cause, the decision to ‘back-load’ them was ‘probably the right choice’.