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Rules are made to be broken – especially for the residents of 11 Downing Street. Even Jeremy Hunt, hired as chancellor to put public finances in order, has managed to miss the government’s budget targets by billions of pounds.
His solution? Change the rules so that he complies. The targets are related to the government’s promises to reduce debt and borrowing.
They matter because it is against these standards that chancellors make big decisions about how much more tax to collect from families and businesses, and how stingy to spend on public services.
Moving the goalposts: Chancellor Jeremy Hunt was on track to miss fiscal targets – so the government pushed back deadlines by a further two years
Part of Hunt’s goal was to reassure financial markets after predecessor Kwasi Kwarteng’s disastrous mini-Budget.
Kwarteng attempted the largest round of tax cuts in 50 years. Hunt has reversed most of that and has now gone even further with the biggest fiscal tightening – tax hikes and spending cuts – since 2010. Still, it was not enough to meet the set fiscal targets.
The goal, in theory, had been to achieve two major goals within three years: to balance day-to-day spending and to reduce underlying debt.
According to the Office for Budget Responsibility (OBR), Hunt was on track to miss those targets by £8.7bn and £11.4bn. So the government pushed back the deadlines by another two years and widened the target posts on borrowing so that it only needs to be reduced to 3 percent of GDP, not wiped it out altogether.
On that basis, Hunt is on track to succeed with £18.6bn left in lending and £9.2bn in debt.
It was, said OBR chairman Richard Hughes, “probably almost one of the most lax” targets since fiscal targets were first set in the UK in the late 1990s.
But he added: “It is also true that it is quite rare these days to comply with tax rules.
“In the past decade there has only been one or two years in which tax rules were actually observed. You also have to take into account a financial crisis, a pandemic and an energy crisis.
“These are difficult environments to run rules-based policies, so you also have to have some sympathy for the people who have to make the decisions necessary to try and comply with these rules.”
Ironically, in September the mini-Budget was found not to have broken any rules, but only in the same way as a drunk driver who refuses to take a breathalyzer test.
Kwarteng regretted that circumventing the OBR’s judgment caused more unrest in the financial markets than failure.
Hunt’s fall statement has so far sparked no bond market outbursts, although at one point after his speech the pound was discounted by more than a penny against the US dollar.
In addition to checking the chancellor’s homework, the OBR made a sobering forecast for the economic path ahead, ruling that the UK is already in recession and predicting that half a million jobs will be lost as unemployment rising in the coming years.
Meanwhile, borrowing will rise to £177bn and the cost of just paying the interest on the government’s mountain of debt will reach an eye-watering £120bn for the current fiscal year alone.
A freeze on income tax thresholds coupled with pressure on businesses will help push the overall UK tax burden to its highest level since World War II.
Disposable income, eroded by inflation, will fall by 7 percent in the coming years, wiping out the previous eight years of growth.
Still, economic forecasts are notoriously slippery and things could get better or much worse. An end to the war in Ukraine could lead to lower energy prices, lower inflation and recovery.
But an escalation of the war, driving gas prices back to their summer highs, could add another £42bn in loans next year, while an additional one percentage point interest rate hike would add around £25bn a year.
The picture for government spending looks bleakest from 2025, when Hunt plans government departments to receive £28 billion a year less than previously planned.
Paul Johnson, director of the Institute for Fiscal Studies, said: ‘Delaying all difficult decisions until after the next general election casts doubt on the credibility of these plans.
“The tight spending plans after 2025 in particular can test credulity.”
But he added that given the uncertainty of forecasts and the damage cuts could cause, the decision to backload them was “probably the right thing to do.”
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