After Kwasi Kwarteng’s disastrous mini-budget, there is no magic cure
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The last time a chancellor of the exchequer appeared on the Sunday morning political shows he helped kick the economy off a cliff-edge.
Seven long weeks ago, Kwasi Kwarteng was still revelling in the aftermath of his not-so-mini budget and its promise of unfunded tax cuts, so much so he promised more to come.
It was that intervention, as much as the cavalier non-budget, that helped markets make up their mind about the UK’s direction under Mr Kwarteng and his mayfly prime minister Liz Truss.
Within hours the pound had slumped and the following day the cost of borrowing soared, a sudden and shocking loss of confidence with long-term consequences for government, business and mortgage holders that is still being felt.
This morning, Mr Kwarteng’s successor used the Sunday platform to try to reassure us, and as importantly the markets, that he is going to clean up the mess.
Jeremy Hunt is only six weeks into the job but he spent as many years as health secretary, and his manner was that of a medic with grave news.
The message from Dr Hunt is that while the patient is very ill, there is a cure, but it’s going to hurt.
“We are going to have to increase taxes and cut public spending to show that we are a country that can pay our way,” he told Sky News’ Sophy Ridge on Sunday programme.
“I’m afraid we are all going to have to pay more taxes.”
These are not words Conservative chancellors go into the job dreaming of uttering, but they are based on a diagnosis of the economy Mr Hunt shares with Rishi Sunak, not long out of the job himself and by some accounts still trying to do it from No 10.
Mr Kwarteng’s tax cuts left a £60bn gap – a “black hole” in political journalese – in government plans to have borrowing as a share of GDP falling over the next three years.
That calculation matters because it demonstrates that the government has a plan to cover its own costs, rather than endlessly borrow to pay for essential services. That gives confidence to investors which in turn makes it cheaper to borrow in the first place.
It should be said that the size and scope of the black hole is itself a political choice rather than economic truism. Governments set the fiscal rules for themselves and can change them any time they like.
Mr Kwarteng’s problem was he presented a plan that did not add up under the rules he said he was sticking to. The Hunt-Sunak challenge is that economic credibility can only be regained by demonstrating a willingness to fill that gap.
Read more: Sunak’s premiership is about to start for real as he faces a huge week at home and abroad
That means announcing plans that outwardly look like they will hammer earners from all income brackets as well as public services and the people that work in them.
If that is the economic reasoning behind Mr Hunt’s relentlessly austere messaging since he took the job, how and if he achieves it is political.
Having promised in the 2019 Conservative manifesto not to raise any of the main taxes, he is instead likely to freeze the thresholds above which they are paid, meaning over time more people will pay more tax.
(That’s “stealth taxes” in the journalese, “fiscal drag” in economic jargon, and “less money” in the real world.)
As for the spending cuts they are less clear, and may remain so after Thursday’s autumn statement.
Mr Hunt appeared to again commit to increasing pensions in line with inflation under the “triple-lock” but he was explicit that striking nurses will not get an inflation-proof pay deal.
Beyond that we wait to see how much detail is offered and how much it means even if it is. Mr Hunt will be setting economic expectations for the next five years, with a forecast for the same period from the Office for Budget Responsibility that investors will read as closely as the autumn statement itself.
But three of those years lie beyond the current parliament, meaning a new government, or as we have seen even a new prime minister, can change course should they choose.
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So the measures we will hear next week are politically non-binding. Some may even be intended as a trap for Labour, an attempt to commit the opposition to unpopular decisions in advance.
There is little doubt however that the economic peril is real. Inflation is above 10%, the energy crisis continues, and we are in the foothills of a recession that will see interest rates rise further.
And there is no magic cure.
