- The Autumn Statement saw the government pledge to restore the UK’s fiscal credibility
- Making economic policy decisions in an uncertain environment is fraught with difficulty
It is hard to believe that less than two months ago, Truss and Kwarteng announced £45bn worth of tax cuts and introduced a 2.5 per cent target for economic growth. In the Autumn Statement, the new chancellor cautioned that the UK economy was poised to enter a recession, and introduced £55bn of spending cuts and tax rises - the most austere measures since 2010. The about-turn has been breathtakingly fast.
The fall-out from September’s “mini” Budget highlighted both the importance of Office for Budget Responsibility (OBR) scrutiny and credible spending plans. Yet chancellor Jeremy Hunt faced the tough balancing act of reassuring markets and avoiding damage to the economy. It seems he may have pulled it off: the Autumn Statement met a muted market reaction, and Paul Dales, chief UK economist at Capital Economics, argues that Hunt has “protected the economy by loosening policy for the next two years and implementing the tightening in the following three years”.
Nevertheless, the £55bn package represents the largest tightening since former chancellor George Osborne’s ‘austerity’ budget in 2010, and comes in the wake of heated discussions about ‘fiscal holes’: a sort of budgetary gap between where public finances are and where the government wants them to be.
Recently, the public finance position has deteriorated significantly. Since the OBR published its last economics and fiscal outlook in March, the economic outlook has worsened thanks to a weaker economy, higher interest rates, and soaring inflation. The OBR estimates that the size of the government deficit would have increased by £75bn on March figures - almost two thirds of this due to higher debt and interest rate costs.
And where the government wants public finances to be has also changed. The government has relaxed its own fiscal rules so that the underlying debt ratio only needs to be falling in five years’ time - rather than three. Hunt also introduced two supplementary fiscal rules during the Autumn Statement, setting out that underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period, and that public sector borrowing must be beneath 3 per cent of GDP over the same period. The slightly looser rules will allow more flexibility on the mix of day-to-day spending and investment, and by the OBR’s reckoning, the government has even left itself a little headroom against the proposed new fiscal targets.
But the OBR also notes that “the risks surrounding this forecast – in both directions – are elevated at present”, and forecast scenarios are extremely sensitive to changes in energy prices and interest rates. The OBR calculates that a 1 percentage point increase in interest rates would lead to borrowing being around £25bn higher in 2027-28. But on the upside, a fall in rates of just 0.4 percentage points would double the chancellor’s headroom relative to the central forecast.
In a climate of such uncertainty, ‘fiscal holes’ can spread, contract - and even disappear. Jagjit Chadha, director of the National Institute of Economic and Social Research think tank has argued that "the black hole is really a function of which telescope you decide to pick...there is a world in which there is not much of a black hole at all”. Meaning the black hole in this case is dependent on current energy price and interest rate forecasts - which have consistently surprised forecasters this year, and will likely do so again.
Academics at the Progressive Economy Forum went even further, arguing that any fiscal difficulties facing the government have little to do with control of departmental spending, investment, or taxation. Instead, the fiscal position is dominated by projected borrowing costs and growth rates - which are all subject to significant levels of uncertainty.
