What does the fall statement have in store for us? A poison pill for work | Larry Elliott Business Writer

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Liz Truss is about to be removed, like Leon Trotsky, from the history books. Just as Joseph Stalin removed mention of his rival from accounts of the Russian Revolution, Thursday’s fall statement will do its best to highlight Truss’ brief stint as prime minister.

It will fall to Jeremy Hunt to deliver the latest in a series of mini-budgets, but there is no doubt that this is a joint operation between neighbors at 10 and 11 Downing Street. It’s the kind of fall statement Rishi Sunak would have made if he hadn’t been thwarted by Boris Johnson during his time as chancellor, or beaten by Truss in the summer leadership race.

To say Hunt and Sunak face a tricky balancing act is an understatement. The economy contracted in the third quarter and could continue to contract for some time to come. There is little time left to change things before the next election. Hunt has repeatedly warned he has bad news to deliver on Thursday, with reports he will raise taxes and cut spending by £50-60billion.

In short, the Treasury is about to announce a set of measures that will deepen the recession, even if time is running out before the government must visit the country. The only real comparison is with Sir Geoffrey Howe’s budget of 1981, which withdrew support for households and businesses through the tax system and spending, even though the economy was in recession. At least at the time, the austerity program was accompanied by lower interest rates from the Bank of England. This time the risk is that Threadneedle Street and the Treasury turn the screw at the same time.

Hunt thinks he has no alternative. This is partly because financial markets expect spending cuts and tax hikes. But it’s also because the Treasury thinks going against the grain would be counterproductive, as it would add to inflationary pressure and lead to even bigger rate hikes from the Bank.

Hunt and Sunak say rate increases must be kept to a minimum if the Conservatives are to have any chance of winning a fifth election. Already, there are signs of a weakening housing market. Mortgage approvals are down, reflecting weaker demand from buyers.

Some easing in the housing market was inevitable once the Bank began raising interest rates from their record low of 0.1%. The affordability of a mortgage is a function of two things: house prices and the cost of borrowing, and as interest rates rise, the cost of servicing a home loan also rises. Mortgage rates above 6% are incompatible with the constant rise in real estate prices. Given the importance of the housing market to the economy, the last thing Hunt wants is to turn a house price correction into a full-blown crash. The fall statement is designed to give Threadneedle Street a reason to take it easy.

Another obvious risk for Hunt is that austerity locks the UK into a low-growth, high-deficit cycle in which slowing activity leads to lower tax revenues and pressure for even more cuts. CBI Director General Tony Danker fears there is nothing in the autumn statement to encourage business investment, and he is right to be concerned. Low levels of investment – both public and private – have been a long-standing weakness for the UK and the Treasury should resist the temptation to cut capital spending. He could also announce a replacement for the two-year super deduction, which expires in April, which gives businesses tax relief on productivity-boosting investments.

So what can we expect from Hunt on Thursday? The wording of the autumn statement will be about getting Britain’s cost of living crisis under control. The inflation figure for October will be released on Wednesday and is expected to show a further increase in the annual rate from 10.1% in September to somewhere near 11%.

This will probably be the peak and – unless something unexpected happens – inflation will fall rapidly next year. Hunt wants the fall statement to be judged on what happens to inflation, because he knows inflation is going to come down anyway. Already, some of the factors driving the 2021 inflationary surge have begun to subside. To take one example, the shortage of computer chips turned into a glut and prices fell sharply. It’s a similar story with wholesale gas prices.

Two other things are worth looking for. First, Hunt is likely to increase state pensions and benefits in line with inflation so he can claim his actions are inevitable but fair. In truth, cutting financial support provided during the pandemic means those on benefits will be even worse off, even with a 10% increase, but the headlines will still be about how the Chancellor has protected the poor.

Second, much of the fiscal pain from spending cuts and tax hikes will be postponed. There is an economic and political justification for this. The economic argument for postponing the tightening is that it avoids imposing more pain when the economy is already vulnerable. The Treasury hopes the boost from its energy price support program will help activity through the winter and that the economy will emerge from recession before most of its measures take effect.

Politically, it also makes sense to delay the worst of spending cuts and personal tax increases until after 2025. Hunt and Sunak can then be rewarded by the markets for their tough action while putting Labor on the spot. Delaying implementation of the measures until the next parliament means the Tories can pressure Sir Keir Starmer to commit to the plans.

Clearly, a poison pill is being prepared for the Leader of the Opposition. He must be careful not to swallow it.


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