HAMISH MCRAE: Too much harm, Chancellor

We have a right to feel fed up. Jeremy Hunt fixed the bond markets, but certainly not the economy. While there are sound reasons to believe that the slog ahead will not prove as difficult as billed, the idea that the government is doing much to improve the long-term outlook for the economy as a whole is very unconvincing.

So first the markets, then what can be sensibly said about the slog, and then what a real growth agenda might look like.

The markets are important, in that the fiscal numbers should look acceptable to the institutions that will have to lend us the money to fund the deficit. It has, with 10-year Treasury bonds closing Friday at 3.25 percent, which compares to the equivalent rate on US Treasuries of 3.8 percent and German Treasuries at 2 percent.

That’s about where you’d expect us to be: below the US but above Germany, where yields are still artificially depressed by European Central Bank policy. At least we don’t pay a lot of premium.

The effort? Well, when a government spends billions supporting people during the pandemic and rising energy prices, eventually someone has to foot the bill.

You can delay paying by borrowing a little more, and you can reduce the actual cost by hitting savers. But now we are faced with the unpleasant truth that taxpayers need to catch up, and since it is the wealthy who already pay the bulk of the tax, they will be hit the hardest. (In 2019/20, the top 1 percent of earners paid 29.1 percent of income taxes, and the top 10 percent paid 60.5 percent.)

The question is then less: ‘Who pays the bill?’ and more: “What makes the bill seem more reasonable?” Here the only answer is better than expected growth. I stick my neck out and think that the forecasts from the Office for Budget Responsibility will turn out to be too gloomy. Certainly, their outlooks are in line with those of the other mainstream forecasters, and they wouldn’t be credible if they were bullish outliers. But there are two reasons to believe that they might turn out to be wrong.

One is that the UK economy may be in a little better shape than popular belief. It is very difficult to know what is really happening when the numbers are distorted by double-digit inflation.

The economy may technically be in recession, but if it is, why are employers still clamoring for people to fill the jobs? Why is the housing market still holding up? Why is it so hard to find rental accommodation in London? Why are retail sales OK? Tax receipts aren’t bad either.

The other is that the global economy will come through better in the coming years than mainstream economists expect. They’ve all been so wrong they’ve lost their confidence and are now overcompensating by ramping up the gloom. The global economy is great at dealing with big blows. I think it will prove to be more resilient than economic models predict.

If this modest optimism about the slog is correct, the government may conclude that it doesn’t need all the tax hikes it has planned to implement, especially in 2024 and beyond. This is smart politics: tell them it was terrible, but because of your brilliant performance it’s not as bad as everyone thought. Not a bad sentence to pitch in a general election.

It’s certainly a better line than the chancellor’s on long-term growth. References to Big Bang and Nigel Lawson? Big Bang was an unavoidable piece of financial deregulation, but is irrelevant now. Nigel Lawson lowered the top tax rate instead of extending it. HS2 and Sizewell C? HS2 is a New Labor vanity project and is overdue and way too expensive. Sizewell C is a similar design to Hinkley Point C, also years late and also too budget. They won’t contribute much to growth, so don’t trumpet them.

A real growth agenda would contain other, more thoughtful elements. It would start with listening to business people about the barriers they face. It would work to remove bureaucratic trade barriers, including with Europe.

It would comb through that huge tangle of rules that hinder smaller businesses. It would simplify the tax, not complicate it. It would address scheduling delays. It would support real on-the-job training. It would improve its own performance. And above all, it would adhere to the Hippocratic oath (in its abbreviated form): “First, do no harm.”

Others will have their own suggestions, but I think we can all agree that quite a bit of damage was done on Thursday.