Laugh it up. (Kirsty Wigglesworth - WPA Pool/Getty Images)


March 7, 2024   4 mins

Fifteen years after the great financial crisis blew Britain’s economic settlement apart, we’re still scrabbling around for a replacement. The staggering scale of our problems was revealed yesterday in Jeremy Hunt’s thoroughly depressing budget statement. Despite heavy doses of magical thinking to make his sums add up, the grim reality of the budget, buried in the small print, is that we are getting poorer and more vulnerable. Even the smallest fluctuations in the international economic climate could have ruinous consequences.

To grasp the scale of our national fragility, you have only to cast your eye across the Office for Budget Responsibility’s report. The basic reality, there in black and white, is as confounding as it is worrying: we are now set to continue to get poorer even as the economy gets bigger, while rising taxes will not fund more spending on public services.

At first glance this doesn’t make sense, but the reasons are simple. The economy will only get bigger because there will be a lot more people in it, rather than because we, as individuals, are getting richer. The OBR’s forecast for the overall size of the economy remained virtually unchanged from last time. Yet it revised down its expectations of GDP per person. In fact, from 2022 we have been getting poorer — a situation which will only start to change from the second half of this year.

But perhaps the most crucial line of all was this: “Economic and market conditions mean the Government needs to run a primary surplus
 of around 1.3% of GDP just to stabilise debt in the medium term.” By comparison, the OBR went on, in the 2010s, “debt could be stabilised while running a primary deficit of 2.1%”. In other words, we now get less for more, literally.

“Britain is suddenly more exposed to events beyond our control which could blow up the Government’s plans”

To illustrate the point, take these figures: taxes as a share of GDP will rise to 37.1% in 2028-29, four points up on what they were before the pandemic. But spending will fall “steadily” as a share of GDP from 44.5% this year to 42.5% in 2028-29. All the while, national debt will rise. Put bluntly, the size of our debt — and the scale of the interest we are paying on it — means we are now much poorer than we used to be. And this is before we consider the economic burden caused by our ageing population and the crisis in Ukraine leeching more money for defence.

And so, facing this reality, even though we are just a matter of months away from the next election, Hunt had barely any room for manoeuvre. The 2p cut from national insurance and the increase in the threshold at which child benefit is removed eased the tax burden on middle-class workers, the voters the Conservative Party will need if it is to stand any chance of avoiding a wipeout whenever the election is called. But even these tweaks around the edges of the tax system required such fanciful assumptions as to be essentially worthless as a meaningful forecast.

To illustrate the point, the OBR states — with damning understatement — that the fiscal forecast is conditioned on the tax take “rising to near record highs, including through planned rises in fuel duty that have not, in practice, been implemented since 2011”. It adds that Hunt’s budget “also assumes the Government will stick to assumptions which imply no real growth in public spending per person over the next five years, despite committing to increase spending on some major public services in line with or faster than GDP.” In other words, get real.

As a result, the Government has essentially spent as much as it possibly could — leaving just £8.9 billion in “headroom”, as the jargon has it, which the OBR points out is historically small — and, perhaps worst of all, decided to put its head in the sand and avoid conducting any detailed department-by-department spending plans beyond 2024-25 because, well, because that would reveal what such a squeeze on spending actually means.

Because of this small margin of error baked into Hunt’s sums, or what the OBR calls “the risks around that central forecast”, Britain is suddenly more exposed to events beyond our control which could blow up the Government’s plans at any moment. “Inflation could rebound and remain higher for longer if the conflict in the Middle East were to widen,” the OBR warns, “or if domestic wage pressures do not subside as quickly as we assume.” Immigration might not prove to be as high as currently forecast, meaning a smaller economy and fewer people to tax while the hoped-for increases in productivity might not materialise either. And most important, perhaps, “the fiscal forecast is highly sensitive to movements in interest rates which have been unusually volatile recently”. Because we are now so indebted, we are at the mercy of those we are borrowing from. The Government, in other words, is flying close to the sun, hoping its assumptions pan out because we can no longer afford to be more prudent.

T.E. Utley captured a similar mood at the fag end of a previous period of Tory rule in 1963, when he bemoaned the sense of drift and purposeless that seemed to have taken over the government. “The prevailing impression of Conservative policy over the last 11 years is one of extreme incoherence,” Utley wrote. “Essentially, we remain in much the same position as we were in 1951.” The same is true today, only worse.

By the time the Tories took power 13 years ago, the economic consensus that had been in place from 1992 — outside the Euro but inside the EU, with low debts and steady growth based on an ever larger financial services sector and booming house prices — had already blown apart. In the years that have followed, we have tried at least three different strategies to replace that old model. First George Osborne bet the house on resurrecting an export-led model of growth with an even more globalised City of London acting as China’s banker to the world. When this failed, Theresa May and Boris Johnson tried different versions of Big State Toryism to increase prosperity outside of the South East of England. When they fell, Liz Truss tried shock therapy only to spark a crisis which saw her kicked from office. Finally, we have Rishi Sunak and Jeremy Hunt who have been left with an ever-decreasing set of options for how to pull the country out of its predicament.

Our grim reality today is that we have no money — and no strategy either. Good luck, Keir Starmer.


is UnHerd’s Political Editor. He is the author of Betting The House: The Inside Story of the 2017 Election.

TomMcTague