No alarms and no surprises: There were few surprises when the Chancellor delivered his Autumn Statement last week, and in many ways this was the whole point. This was a fiscal event with the primary aim of reassuring the markets and the country that the government that the ‘grown-ups’ were back in charge and as a result the entire contents were extensively briefed beforehand. Rhetorically Jeremy Hunt attempted to do two things in the statement. The first was to deflect blame for the dire economic situation away from the government. The message was that a combination of Russia, Covid and (unspoken) his predecessor were responsible for the country's economic woes. The second was to reassure both voters and his own MPs that the choices he was making to manage those woes could have been worse, hence the talk of a “balanced approach” between spending cuts and tax rises.

  • Context is king: The OBR was famously excluded from the last fiscal event, but the agency took centre stage here, predicting a long recession and the biggest fall in living standards on record. This combination, described as “horrific” by economist Duncan Weldon, was the main story from the day and presented a bleak picture of the next few years, with real disposable incomes set to be lower in 2028 than they were pre-pandemic and the value of workers’ pay packets not expected to return to their 2008 level until 2027 according to Torsten Bell of the Resolution Foundation.
  • Moving the goalposts: In response, the main decision the Chancellor took was to loosen the fiscal rules set by his predecessor in order to avoid even greater spending cuts or tax rises. He extended the period until the debt-to-GDP ratio needs to be falling until the fifth year of the forecast period (up from three years), and introduced a new rule that total public borrowing in the same period should not exceed 3% of GDP. This loosening was in some ways a tacit admission that the government’s pre-statement rhetoric on the ‘fiscal black hole’ was always overblown, and the government always had the option of changing its fiscal rules. Interestingly, Hunt did not use the phrase ‘black hole’ once in the statement. (See our recent Digest on the fiscal debate). It is also a reminder that these rules define the terms of our political and economic debates, and they still receive relatively little scrutiny considering the enormous impact they have.
  • Tough choices: These new rules may have been looser, but they still committed the government to a substantial fiscal tightening in the next five years. The Chancellor delivered this in two ways. The first was through a series of tax rises in the near term, billed as “asking more from those who had more”. In fact, the majority of the extra revenue came from freezing income tax thresholds for those on low and middle incomes - an effective reversal of the major tax policy of successive Conservative governments from 2010 onwards. CAGE’s Arun Advani unpicks the tax changes here, arguing that the government should have gone much further on taxing wealth. The second plank of the plan was a £28bn squeeze on public spending in the years after 2025, with some areas such as health and education protected. Tackling inflation was one of the justifications for these cuts, and inflation will make this squeeze feel even worse, with the TUC and NEF warning that public services needed an extra £43bn just to stand still.

That’s how you get a doom loop: The phrase ‘doom loop’ was heard from both sides of the chamber in the debate, referring to the idea that spending cuts and low investment would trap the UK in a cycle of economic stagnation, leading to more spending cuts. With the short-lived ‘plan for growth’ of the Truss era consigned to the scrapheap, the Chancellor reassured the Commons that the government was still committed to growing the economy. The problem, as IPPR’s George Dibb points out, is that the OBR thinks the measures announced will do almost nothing to lift the UK’s anaemic growth rate.

The big squeeze: The government saw stabilising the public finances as their task in this statement, but for the public the main issue is that their personal finances remain in crisis. Despite the squeeze on households, the government announced precious little help on the cost of living in the statement. The Chancellor attempted to present automatic upratings to pensions, universal credit, and the minimum wage as acts of generosity from the government, whilst announcing a small package of extra grants for the most vulnerable in 2023.

  • High prices, guaranteed: Hunt also confirmed that his decision to abandon the pledge to freeze energy prices for two years would result in the level of the Energy Price Guarantee rising from £2500 to over £3000 from April 2023. As IPPR’s Carsten Jung points out, this is a far lower level of support than that being provided by comparable countries like Germany.
  • Make me energy efficient, but not yet: Campaigners have long been calling on the government to invest in energy efficiency and home insulation programmes which would reduce bills, save government money, and cut down on carbon emissions. The Chancellor did at last commit to action on this front, establishing a new Energy Efficiency taskforce and a target to reduce energy consumption by 15% by 2030. But with funding not available until 2025, campaign group Warm this Winter warn that millions will still face fuel poverty this winter. 
  • Pay under pressure: The other effect of the government’s squeeze on public spending will be to intensify the battle over public sector pay rises. Unison General Secretary Christine McAnea responded by warning that: “Health worker wages must be boosted now to prevent a damaging dispute this winter. Otherwise, the NHS can’t hang on to experienced staff, halt the damaging exodus of key workers or improve wait times for patients.”

A trap for Labour?: The decision to delay spending cuts until after the election in 2025 was justified by the Chancellor as a decision not to further weaken the economy going into a downturn, but has been widely interpreted as a trap for Labour. The message the government wanted voters to hear around the statement was that they are willing to take the tough decisions to deal with an economic crisis not of their making, while Labour refuse to face up to reality.

Cycle of stagnation: Labour’s main economic argument is that 12 years of stagnation and 12 years of chaos left the UK economy in a historically weak position, and that major investment (particularly in the green transition) is needed to force the UK onto a higher growth trajectory. Squaring this analysis, and the need to rebuild public services, with the commitment to fiscal discipline and the need to avoid the government’s spending trap will be the terrain for the coming years of political battle.

Weekly Updates

Climate change and energy

COP27. The COP27 UN climate summit concluded last week in Sharm el-Sheikh with a new funding agreement on loss and damage which would see a global fund set up to provide financial assistance to countries who have been most affected by the climate crisis. Loss and damage has been a key demand of developing nations for 30 years and was first introduced to UN climate negotiations around 1991. The agreement, which came after the final negotiating session ran 40 hours beyond its deadline, does not yet outline how finance will be provided and where it will come from. For more in-depth coverage on the COP27 negotiations, please see last week’s Digest

  • An “implementation COP”? Despite the Egyptian presidency promising an “implementation COP”, many have voiced concerns that although there was progress on the impacts of climate change through loss and damage, there was little action on causes. Some countries attempted, unsuccessfully, to reverse the goal of keeping global temperatures to 1.5 degrees above pre-industrial levels and a resolution to cause emissions to peak by 2025 was removed

Green Central Banking Scorecard. Positive Money has launched its 2022 Green Central Banking Scorecard, ranking the G20 central banks on their climate credentials. The scorecard rates the banks against four metrics: research advocacy, monetary policy, financial policy and leading by example. The Eurosystem central banks (France, Germany, Italy, and the ECB) have topped the Scorecard due to their leadership on greening monetary policy. Japan and China, which rank eight and joint sixth respectively, are credited for their green lending schemes but have “been held back by their failure to decarbonise their monetary policy”. 

Winter Power Tracker. The Energy and Climate Intelligence Unit (ECIU) has published its latest Winter Power Tracker, which finds that the contributions of renewables and other forms of generation are reducing the amount of gas that is needed for power generation. The tracker analyses electricity generation from different sources across winter 2022/23. In the period from 1st October to 18th November 2022 (seven weeks), renewables generated 16 TWh of electricity compared to 15 TWh from gas. The 16TWh of electricity generated from renewables would have required 33TWh of gas to generate the same amount of electricity. 

Industrial strategy and business

Britain Remade. A new campaign has launched which aims to promote economic growth and “put forward practical solutions to the problems holding Britain back”. Britain Remade, headed by former Number 10 adviser Sam Richards, calls for new energy infrastructure, new housing and new local transport connections. Polling commissioned by the campaign found that two thirds of the public would back renewable energy projects, even if they were built near their homes

CBI conference. Both the Prime Minister and the Leader of the Opposition made keynote speeches at the Confederation of British Industry (CBI) conference this week in a bid to win the support of business leaders.

Paradigm shift

Who Funds You? UK’s “most secretive think tanks” took nearly £15 million from mystery donors over the past two years, according to new analysis by openDemocracy. Through its “Who Funds You?” campaign, openDemocracy has ranked think tanks based on the transparency of their funding according to the organisations’ own income disclosures. Nine out of 28 think tanks, with a total income of at least £14.3 million, received an ‘E’ rating, the worst possible score, and have made public no or very little information about the sources of this money. The nine ‘E’ rated organisations were the Adam Smith Institute, the Centre for Policy Studies, Civitas, the Institute for Economic Affairs, Legatum Institute, Policy Exchange, and TaxPayers’ Alliance.

Inflation and inequality

New inflation figures. Last week, inflation jumped to 11.1% which is the highest rate since 1981. According to ONS figures, this figure would have been over two percentage points higher (13.8%) had the Energy Price Guarantee not been introduced. Before the Energy Price Guarantee was introduced, research by the IPPR think tank found that capping energy prices would reduce inflation significantly and that returning energy prices to November 2021 levels could reduce inflation by as much as 5.6 percentage points

  • Inflation breakdown. While the headline rate of inflation was 11.1%, it is estimated that the rate for low income households is more like 11.9%. The price of many essential food items has risen far above the 11.1% figure, with the annual CPI increases of milk, pasta and cheese up 48%, 30% and 27% respectively, according to Reuters’ Andy Bruce. Put another way, £5 today only goes as far as £3.97 did at the time of the Brexit vote and £3 today buys what £2 did at the start of the 2008-2009 recession. 

Wage price spiral questioned. A new paper from the IMF looking at the historical evidence on wage-price spirals in advanced economics since the 1960s has played down the risks "an acceleration of nominal wages should not necessarily be seen as a sign that a wage-price spiral is taking hold."

Equal Pay Day. Sunday 20th November marked Equal Pay Day, the day of the year where women effectively stop earning relative to men. The gender pay gap, calculated using mean, full-time, hourly pay gaps, is currently 11.3% - a small decrease from last year’s figure of 11.9%. Read the Fawcett Society’s latest explainer on the Gender Pay Gap.