Chancellor Jeremy Hunt has repeatedly warned that his Autumn Statement on Thursday will be “eye-wateringly” difficult. Less has been said about how he hopes to turn this bleak exercise in fiscal discipline into a platform for a Conservative election victory in 2024.
Hunt has promised to “restore trust and confidence in our national finances”, and tame high inflation. But he is also a politician, and the Autumn Statement will be laden with political calculation and potential traps for Labour.
With taxes set to rise for all Britons on Thursday and a new round of austerity looming — Hunt is exploring a fiscal tightening of £55bn a year — the political challenge facing the chancellor is immense.
Hunt’s focus on the cost of living
Rishi Sunak, speaking at a G20 summit in Bali, said Hunt’s principal aim on Thursday was to show voters the Tories had a plan to “reduce their cost of living and limit the increase in mortgage rates”. Unless he achieves that, the next election is probably lost.
Taming inflation is, according to Hunt’s allies, the ultimate economic growth strategy, since it would help bring down interest rates, taking the pressure off households and businesses. “It’s entirely about inflation,” said one.
Tory strategists hope that if Hunt can stabilise the economy and he gets a lucky break — maybe an early end to the war in Ukraine or a fall in energy prices — the economy could be pulling out of recession before the election.
Sunak hopes to emulate John Major’s election win 30 years ago, when he took over from an unpopular prime minister — Margaret Thatcher — and promised a new start and a brighter economic future.
“It’s 1992 again,” said one Conservative strategist. “By 2024 we could be seeing some green shoots of recovery, we’ll say the tough decisions we took are paying off, and we’ll be asking ‘What’s Labour’s plan?’ You never know.”
Tax rises could unleash a voter backlash
Hunt has promised “compassion” will be at the heart of the Autumn Statement, and is expected to uprate state pensions, welfare benefits and the minimum wage by about 10 per cent, in line with the September inflation rate. The poor will also get extra help with their energy bills from April, when universal support is due to end.
Hunt said on Sunday tax rises will affect everyone and there is likely to be a voter backlash. But there will be moves designed to prove to working class voters in seats that the Conservatives seized off Labour at the last election that the Tories are not reverting to type and helping the rich.
After Liz Truss’s ill-fated tax giveaway to the wealthy in her “mini” Budget in September, Hunt will cut the threshold of the top rate of income tax from £150,000 to £125,000, and raise taxes on dividends and capital gains.
Anthony Wells, political director at pollster YouGov, said that people only support tax rises which fall on people richer than them, while being more tolerant of “stealth” tax increases “they don’t really understand”.
Hunt knows this applies particularly to “fiscal drag”: sucking more people into the tax system or higher tax bands by freezing allowances and thresholds relating to income tax and other levies. He will do this until 2028, raising more than £10bn a year.
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Some spending cuts will be delayed
Wells said that polls suggest the public is only enthusiastic about cutting one type of government spending: overseas aid. Hunt will recognise this by freezing aid spending at 0.5 per cent of gross domestic product, saving £5bn a year.
Defence is among the other areas where Hunt is expected to squeeze budgets. “People don’t think they will see the effects themselves unless someone invades us,” said Wells. Hunt is expected to drop promises by Truss and Boris Johnson to increase defence spending.
Other cuts are likely to be passed on to local councils to deliver — thanks to reductions in central government support — although when Tory council chiefs start to point the blame at Hunt, this could be politically awkward.
Austerity across the board will be extremely painful, so Hunt has decided to defer the biggest cuts until after the next election, in the hope that the economy will start to recover by then, allowing him to reverse some of the proposed reductions, which could be worth more than £25bn a year.
If the economy is flatlining, the task of delivering those cuts could well be Labour’s problem anyway. Labour leader Sir Keir Starmer would have to say how he would pay to reverse any of the planned post-election cuts.
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Aiming to set a trap for Labour
Under the Tories’ 1992 election playbook, Major claimed he was a clean break from the Thatcher era, that his government had taken tough decisions and that now the “green shoots” of recovery were coming through.
Starmer knows the Tories will try to rerun a similar campaign, claiming that Labour would undo Sunak’s hard work, probably raising taxes to pay for higher spending. Neil Kinnock faced the same claims in 1992.
In the meantime Hunt is likely on Thursday to push Labour to either accept the existence of his “fiscal hole” — and thus endorse his tax rises and spending cuts worth about £55bn a year — or show how the opposition party would raises taxes instead.
Shadow chancellor Rachel Reeves will dodge the question in several ways, including by saying the precise size of the budgetary hole is unclear.
She said on Sunday: “We recognise we are going to inherit this mess. It will put a constraint on us.” She will argue Labour would raise taxes in a “fairer” way, including by targeting people who enjoy tax perks in the UK by having non domicile status.
Alistair Darling, the former Labour chancellor, said the Tory strategy would not work, arguing that Truss’s “mini” Budget was a scarring economic event similar to Major’s Black Wednesday crisis shortly after his 1992 election victory. “Trying to say it will be worse under Labour won’t work this time,” he added.