Hunt’s plan may appeal to markets, but austerity without real growth would be fatal | Mohamed El-Erian

Jeremy Hunt will not appreciate today’s newspapers. “The Conservatives soak the wrestlers”, agonizes the Mail, the condemnation supported by the complaint of a columnist: “And I thought we had voted for the Conservatives”. “From bad to worse,” says the Guardian. “Hunt paves the way for years of pain,” says the Financial Times. “Carnage”, predicts the Mirror. “Years of fiscal pain,” warns the Times.

But her fall statement was never going to be easy or please everyone. It had to meet multiple objectives, some of which are contradictory in the short term; it was positioned to pursue an overall budgetary effort greater than what I consider strictly necessary, and it had to reconcile economic and financial realities with political and institutional priorities.

By the next morning, it seems clear that what was heralded in yesterday’s particularly restrained speech cast aside much of what many might consider Conservative Party ideology. Instead, there is a pragmatic, multi-year approach which, unlike the previous government’s approach, prioritizes economics over politics. While they are well placed to meet the market’s immediate test of fiscal responsibility, its longer-term benefits will erode, however, unless more is done to promote high, inclusive and sustainable economic growth.

The national context of the declaration and its implementation is far from simple. Inflation rose to 11.1%, a rate not seen in 41 years and which notably increases borrowing costs. The pressures associated with the cost of living are even more problematic for low-income groups whose rate of inflation, according to the Office for National Statistics, has never been higher compared to that of the population as a whole. .

It’s not just about inflation, which the Office for Budget Responsibility forecast accompanying the statement is expected to remain high at 7.4% next year. Unusually for times of such high inflation, the economy is already contracting, sliding into a recession which the OBR predicts will cause GDP to contract by 1.4% in 2023 and, according to the Bank of England, could well extend into 2024. As a result, average household income per person would experience a record drop to a level not seen around 10 years ago.

The front pages of UK newspapers for Friday 18th November.
“Jeremy Hunt won’t like today’s papers.” The front pages of UK newspapers for Friday 18th November. Compound: Mirror, The Times, The Guardian, Daily Record, i, Daily Mail, Financial Times, The Daily Telegraph

It is not an easy environment to pursue policies that clean up the budget, contain inflation, restore the country’s economic reputation, protect the most vulnerable segments of our society, and promote growth and productivity. It amplifies the challenges facing a government seeking to subsidize energy use – albeit less than the previous government – to protect pensions and stabilize the debt burden after massive Covid fiscal transfers.

Fortunately for the Chancellor, the external environment is less nervous than when the previous government made its unfortunate mini-budget. Helped by inflation rates in the United States falling faster than consensus forecasts, global interest rates have fallen and the pound sterling has strengthened, which has helped reduce interest charges and imported inflation. Indeed, these key market variables are more favorable for the UK than they were on the eve of the disruptive mini-budget.

In this context, the Chancellor announced a “stability, growth and public services” approach whose title, at least on the surface, resembles a typical Conservative Party budget – that is, a heavy dose of fiscal responsibility s ‘standing at £55 billion, more than is needed in my view; just over half of which must be covered by spending cuts rather than tax increases. The details, however, point to a more pragmatic approach, with economics dominating politics – a stark contrast to the approach of the last Conservative government – ​​and with the wealthy bearing a significant part of the burden for a tax-to-GDP ratio reaching its highest. high level since the Second World War.

Judging by history, many of the tax measures would not have been easy for a Conservative government. This includes higher and broader taxation of windfall profits from the energy sector, reduction of the dividend allocation, extension of the coverage of the maximum rate of income tax, reduction of the annual exemption capital gains and larger corporate contributions to national insurance. . Spending cuts are delayed, with most cuts coming in the next legislature. The national living wage is increased by almost 10% while, on the expenditure side, education, health and social assistance are treated relatively favourably.

This does not mean that low income groups are not affected. Particularly because of what economists call the “tax drag,” more people will be drawn into the tax net because the minimum threshold for paying taxes remains constant at a time of higher nominal wage growth.

The real problem with a fall statement that swapped big bang measures for many smaller measures isn’t about narrow budget issues. It is much more about the high, inclusive and sustainable growth that the UK needs to meet the vast majority of its economic and financial challenges. Although the government has rightly emphasized the trio of energy investments, modernizing infrastructure and improving innovation, this is unlikely to constitute a sufficient policy package to promote productivity improvements and economic growth. required.

At a time of a slowing global economy and tighter financial conditions around the world, the government will need to closely monitor developments in the country’s growth momentum, lest its drive to restore fiscal credibility turn into excessive and self-destructive austerity. It will take more to, in the words of the Chancellor, turn the recession made in Russia into a recovery made in Britain.

His declaration will have to be followed by stronger measures to overcome the legacy of too many years of sluggish productivity and weak and insufficiently inclusive growth; redefining the UK’s international economic relations after Brexit; and to reorient the economy towards a greener and more dynamic future.

Without it, history might see it as little more than a well-meaning, but insufficient, attempt to restore dynamism and fairness to the British economy.

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