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This is the greatest crisis of our lives. Hunt’s Budget makes it worse


THIS is a crisis born out of serial material errors over many years and short-term fixes designed to kick the can down the road. Yesterday’s Budget compounds the error.

It not only raises taxes to an unprecedented peacetime level but it utterly fails to address the fundamental problem of far too much Government, far too much regulation and a dreadful bang for the buck. Rather than spending cuts, spending will continue to increase in real terms.

Chancellor Jeremy Hunt smirks with pride as he says public spending will rise 1 per cent real in each of the next five years as the private sector pays the price. Without a hint of irony he says: ‘As Conservative we do not leave debt to the next generation’.

He is either poorly advised or forgetful. David Cameron inherited a national debt of £821billion. It is £2,434billion today, a tripling in just 12 years. That’s the Conservative legacy: massive debt, massive tax and shocking locked-down public service.

We live in an age of extraordinary innovation, medical, scientific and technological. We should be in clover. That we are not is entirely the fault of our political establishment. The failure is economic, moral and cultural, but from an economic perspective it is primarily four-fold; you will note the B-word is absent and irrelevant to the malaise.

Exhibit One: The delusion of free money and the absolute failure of central banks to normalise monetary policy in the decade when they had the chance after the global financial crisis. This policy broke the link between tax and spend, enabling governments to spend with impunity, forgetting that free money and quantitative easing (QE) were unprecedented in the 300-year history of the Bank of England with no Plan B to unwind.

Exhibit Two: Net Zero. The cancellation of carbon, the very basis for the Industrial Revolution, with a cost-ineffective and unproven alternative which breaks every rule of economics. All previous revolutions were market-driven. The car replaced the horse because it was better and ultimately more cost-effective, Net Zero is based on virtue-signalling without regard to cost or even certain reliability. No sane policy is implemented without knowing the implications, and no major technology transfer has happened before without a market-based proven alternative.

Exhibit Three: Lockdown. £500billion wasted on furlough, bounce back loans, test and trace and the like, extending the free money QE delusion, weakening the productive private sector and causing all sorts of negative side effects from mental health to hospital waiting lists, from 18 per cent of pupils still not turning up to school to shortages and economic inactivity. It has uprooted society and created serious long-term problems.

Exhibit Four and arguably the only one that is not self-inflicted: war in Ukraine with its tragic consequences and impact on energy price.

Our establishment have utterly failed us. They have failed to address the uncontrolled and grossly inefficient level of public spending, they have failed to incentivise the growth engine, the private sector, with further dispiriting tax rises, taking tax to the highest level since war-worn 1948. They have failed to provide any hope.

The scale of the tax rises is staggering, as outlined in the chart below. From a low of 28 per cent of GDP in 1993, taxes will have increased to 37 per cent of GDP by 2027, a 40 per cent real terms rise. Is our education better, or health, or police force? Are the Army and Navy bigger? Are we less regulated and able to go about our business unhindered? Exactly what is there to show for this staggering rise?

Source: ONS

Frankly this Government’s actions are far more extreme than Jeremy Corbyn promised in 2019. Tax as a proportion of GDP was 32.9 per cent then, and 37 per cent by 2027 is far higher increase than Corbyn ever proposed. Public spending was £884billion in 2019; it will be £1,100billion next year. Inflation was 1.5 per cent in 2019, now it is 11.1 per cent. Some record.

This Government has no excuses. They won an 80-seat majority in 2019. Johnson blew it with economically illiterate decisions backed by a central bank who were frankly incapable of seeing that monetary experimentation should at most have been an emergency measure, not a 12-year jolly.

Inexcusable is the inability to control the growth of the state. The table below demonstrates how embedded public spending is: a 25 per cent increase in public spending over lockdown of which 80 per cent has stuck as the economy has opened up. Despite this Hunt can find nothing to cut. Spending will continue to rise in real terms each and every year and in some cases (NHS and education) materially.

Source: OBR

The bang for the buck is outlined below. Public sector productivity is lower than in 1998 despite all the technological advances there have  been.

Source: ONS

But this is just the start. The real ticking timebomb is the accumulated public debt. As can be seen from the chart below, the cost of servicing all that Government debt barely changed between 1998 and 2020 as the cost of borrowing compressed and debt went up five-fold. What a wheeze.

Now though with inflation at 11.1 per cent and gilts yielding 3 per cent, the cost of servicing that debt will likely go from £40billion to £105billion by next year, an increase greater than the entire defence budget.

Source: ONS

As the economy moves into recession as the cost of debt escalates (as an example a five-year fixed rate mortgage which cost 2.3 per cent typically a few months ago is now around 5.2 per cent today), dwarfing the more than doubling of energy costs, this Government tightens by £50billion, or 2 per cent GDP. The seeds are tragically sown for a major recession. Yesterday’s Budget is counter-productive, undermining confidence and rewarding failure. It will further undermine the public finances, risking yet more tax rises and so it goes on.

No one is saying that given the mess they have created a recovery strategy is easy. It is not. While unfunded tax cuts are not credible, what would have been credible would have been to pare back spending to pre-pandemic levels in real terms. Taking spending back to 2019 levels is hardly a big ask.

Given the technological age we live in, efficiency savings should be material. Spending should be falling as a proportion of GDP, not rising and it could be with sensible controls and a re-assessment of what the state does. Are we really to believe that spending is a one-way ratchet, only up? That is what this craven, cowardly Conservative Party seems to believe.

There is another way. Failed economies can recover, and very quickly. Look at the great success of Eastern Europe after the tragedy of 70 years of Marxism. Unleash the people and they will innovate, trade and prosper.

Despite appalling governance, Britain still possess numerous world-class assets, from financial services to business and professional services. From soft assets like sport, culture and media to logistics and distribution. From precision engineering to biotech and pharmaceuticals, from whisky to elite education. The list goes on. All our excellence is in the private sector; precious little is anywhere near Government.

So, what to do? Besides cancelling HS2 and other similar vanity projects, which is an easy win, over £100billion of public spending normalisation should be the simple starter. This merely takes real spending back to the eve of lockdown. Hardly a big ask and something to build on.

This could have funded tax cuts focused on a genuine growth strategy. Reshape the state merely back to 2019 levels and instead of tax rising to 37 per cent of GDP it could have fallen back to 33 per cent. Again, this is very modest: simply the pre-lockdown level and far higher than under even Tony Blair.

That signal of intent would have single-handedly lifted the pall of depression over the land. It would have given hope and created a base to build on. It would have stimulated growth and lessened the pain of rising interest rates. Sure, the next 18 months or so would still have been tough but recovery would have been swift. That really is the only option left to Britain. This tax, spend and waste is the road to ruin. Sooner or later there will be no option but to bite the bullet.

This article appears today in Brexit Watch and is republished by kind permission. 

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Ewen Stewart
Ewen Stewart
Ewen Stewart is a City economist who runs the consultancy Walbrook Economics. He is director of the think tank Global Britain and his work is widely published in economics and political journals.

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