Hunt Budget realities

Peter Hain says budget tax cuts for the richest mean public services face even deeper austerity from the latest Tory budget

When Rishi Sunak made David Cameron Foreign Secretary, critics noted that bringing ‘the architect of austerity’ in from the cold was at odds with the Prime Minister’s claim at the 2023 Tory party conference to be leading change and ending a thirty-year status quo.  

Jeremy Hunt’s autumn statement adds weight to the criticism. His decision to pay for £20 billion in tax cuts by a real terms squeeze on spending on public services by allowing inflation to erode the real value of department budgets is a return to post 2010 Tory austerity.

The true scale of the Tory cuts in public spending, those already made plus those in prospect, are truly frightening.

The Office for Budget Responsibility has confirmed that the first decade of Tory austerity from Chancellors George Osborne and Philip Holland involved cuts in public spending amounting to over seven per cent of GDP.  That is equivalent to £180 billion in today’s terms, more than we spend each year on health and social care in England.

Cameron and Osborne quit Downing Street in 2016.  But when Cameron’s memoirs appeared in 2019 he admitted that had he stayed in office he would have pursued even more public spending cuts. George Osborne’s final budget in March 2016 revealed plans for a further five-year fiscal squeeze. Plans which would have added another £60 billion of public spending cuts to those actually made by Philip Hammond. 

Sunak and Hunt are now exploring the kind of cuts for the next five years that Cameron and Osborne had in mind for 2016 to 2020, cuts that would have meant ten years of Tory austerity totalled some £240 billion in today’s terms, much more than the £180 billion of cuts that we actually endured.

The Institute for Fiscal Studies has been unable to assess how tight the Sunak squeeze would be on the budgets of each unprotected department because the latest OBR report provides no breakdown of departmental spending beyond 2024-25.

The Tories have obscured their spending plans, but the pain would be only too real if they were to remain in office.  So severe that respected independent analysts such as those at the Resolution Foundation and the IFS doubt that cuts of the kind being contemplated could be sustained.

Britain can only return to fully funded public services and rising real living standards if we can revive rapid economic growth. Between 1997 and the eve of the global credit crunch in 2007 the UK economy grew at an average rate of three per cent per year. By contrast the Office for Budget Responsibility forecasts GDP growth of less than one per cent per year in the near future.  The Bank of England even less.  Achieving faster economic growth would require Britain to raise its woefully low national rates of investment and saving.

IMF data shows that in the 14 years before the 2008 global financial crisis – most of it under Labour – UK productivity rose at an average annual rate of well over two per cent.  But in the 14 years following the financial crisis – most of it under the Tories – productivity only improved at a measly average annual rate of less than half of one per cent.

The stand out factor for this worsening economic performance is our pathetically poor rate of investment, both public and private.  According to the IMF between 2010 and 2022 UK investment as a share of GDP was the lowest in the G7, and UK savings far below even that, leaving the UK highly dependent on foreign capital.

A Resolution Foundation study in March 2023 found that Britain has been a laggard when it comes to public investment, in the weakest third of OECD countries. Had Britain matched the average OECD rate of public investment over the past 20 years UK public investment would have been a massive £500 billion higher. This long-term failure to invest in our healthcare, housing and transport services is the reason why Britain has fewer hospital beds per person than all bar one OECD economy and why the British spend more time commuting to work than all bar two other OECD members.

Andy Haldane, former chief economist at the Bank of England and now director of the Royal Society of Arts, has noted that as well as being too low, UK public investment levels are too volatile.  The annual growth rate of public investment fluctuates due to HM Government announcing investment plans and then scrapping them before they reach fruition. Witness the government’s HS2 shambles. 

The planned increase in public investment announced by the Boris Johnson government in 2020 was later cut following the Liz Truss “disastrous mini budget”.  Rishi Sunak’s administration is now planning for public investment to fall as a share of GDP in each of the next five years, reversing most of the increases announced three years ago.

Resolution Foundation economists calculate that setting public investment at a stable three per cent of GDP, about £75 billion, would boost UK economic growth by nearly one per cent per year over five years, and stay within the debt rules accepted by both front benches.  But the government’s present plans envisage public investment dropping from £72 billion this year to only £57 billion in five years’ time.

The independent National Infrastructure Commission chaired by Sir John Armitt agrees that decades of inadequate infrastructure investment have held UK productivity back, singling out public transport, home heating and insulation, and water networks as all being in urgent need of renewal. It advises that making the UK’s infrastructure fit for the future will require an extra public investment of £30 billion per year, plus at least £40 billion per year from the private sector. That extra £30 billion per year in public investment might have been more but for the restrictive remit set by George Osborne when he created the Commission in 2015. Everywhere we find evidence of Tory economic failure we also find George Osborne’s fingerprints.

His austerity policy drastically curtailed UK economic growth, triggering a severe slowdown in the rate of increase in British productivity and a standstill in real household living standards.

Over 80 per cent of the Tory spending cuts fell on public sector budgets, with under 20 per cent comprising tax increases. Yet Sunak and Hunt have given priority to tax cuts today instead of undoing some of the damage that years of Tory austerity have done by rebuilding public service budgets.

A decade of Tory austerity has inflicted huge self-harm on Britain’s public services, the Institute for Government finding eight of nine public services performing worse now than before Covid. Hospitals and courts stand out, with waiting lists for hospital treatment at ten million and a backlog of nearly 90,000 court cases. 

The government’s spending plans mean that however bad the plight facing Britain today, the outlook after 2025 is even worse – unless of course Britain is saved by a Labour government.