Big Government, Big Borrowing and Big Inflation are probably here to stay
Whatever the merits of these policies, they are emphatically not disinflationary, and the extra spending will not be covered by tax rises. The OBR expects pandemic-levels of public borrowing to continue: £177 billion this financial year (up from £133 billion last year) and £140 billion in 2023/24. Debt as a proportion of GDP is not expected to peak until 2025/26, by which time the Conservatives are unlikely to be in power.
Jeremy Hunt has played the part of the thrifty accountant so convincingly that the first question on Question Time last week was ‘Can the British economy survive another two years of austerity?’ But it is a confidence trick. Even the left-wing Resolution Foundation admits that public spending will continue to rise in real terms until 2025/26. By 2027/28, total public spending is expected to reach 43.4%, up from 39.3% before the pandemic.
OBR forecasts can be taken with a pinch of salt, especially when a change of government is on the horizon, but the trajectory is clear for the rest of this Parliament. There will be no serious attempt at public sector reform and no effort to improve productivity. The Conservatives are doing what they have always accused Labour of doing: spending beyond their means and leaving the mess for the next lot to sort out.
The autumn statement was designed to show that the government will be fiscally responsible in the medium term. Paraphrasing John Maynard Keynes, the Tories are saying to themselves that in the medium term they are all out of office. Judging by the opinion polls, voters have decided that if they’re going have high taxes and high spending, they might as well elect a party that truly believes in such things. If the Tories are kicked out in 2024 they will have spent 14 years increasing the national debt from £1 trillion to nearly £3 trillion while earning a reputation for being budget-slashing spendthrifts. Quite an achievement.
The government claims to be getting the public finances in order and tackling inflation, but while its Five-Year Plan may be enough to appease the bond markets, inflation is being allowed to run rampant. The OBR projects an inflation rate of 7.4% next year, not much lower than the 9.1 % of 2022. The pound in your pocket is shrivelling. Hunt’s stealth taxes may cost us a few hundred pounds, but inflation is quietly costing us thousands, not only by gnawing away at our savings and incomes but by raising the interest on the national debt.
Debt interest payments will be a staggering £120 billion this year and there will be another hefty rise in pension payments under the triple lock in 2023. Inflation is at the very heart of all our problems and yet neither the government nor the Bank of England seems to have a plan apart from crossing their fingers and hoping it goes away.
Perhaps it will. There are reasons to think the OBR’s inflation forecast is too pessimistic: the cost of shipping has been falling, China is quietly abandoning Zero Covid, base effects from the rise in gas prices should settle down within a few months. But there are also reasons to expect inflation to stay high: nominal pay has been increasing by more than five per cent, Bank Rate is minus 8 per cent in real terms and the price of many commodities is still rising.
Whether the OBR is right or wrong, it is their forecast that is supposed to be informing policy. The government has essentially turned a blind eye, pumping more borrowed money into the economy in the belief that another year of soaring prices is a price worth paying for a slightly milder recession. With incomes expected to fall by seven per cent in real terms thanks to the rising cost of living, to say nothing about the impact on savings, that is at least debatable.
This article was first published in the Telegraph.