HAMISH MCRAE: Brace yourself for a dismal Thursday budget

It’s going to be a gloomy week. New Chancellor Jeremy Hunt is promising us “a tough road,” who must make “dazzling” decisions about “very difficult choices” over future tax and spending plans in the fall statement on Thursday.

Liz Truss and Kwasi Kwarteng’s dash for growth project is stone dead. Not only will we all end up paying more taxes, on top of higher utility bills and higher mortgage rates, but government spending plans will also be cut.

And all this against the backdrop of an economy sliding into recession. Oh dear.

On Thursday we get three important things. One is the new forecast for the economy from the Office for Budget Responsibility. A second is the government’s medium-term spending plans. And third, there are their plans to tax us.

These three elements are stitched together to show that the government is indeed responsible, in that the debt-to-GDP ratio will fall in the long run.

The OBR then gives it the seal of approval and the markets happily fund the debt. That’s the idea. But in the real world, life is more complicated.

The OBR isn’t particularly good at forecasting, but to be fair, it’s not particularly bad either. Over the past few years, the government deficit has fallen much faster than predicted, but this year it has gone the other way.

Mid-term spending plans are fine. But little things like the pandemic and the need to help people pay their gas bills change everything. And taxes sometimes bring in more money than expected, sometimes less.

So next Thursday, the challenge will be to take each of those three bits and try to figure out which parts are realistic and which are overly pessimistic. Too pessimistic? Well, yes.

There is strong incentive to be, because if things turn out better than expected, the chancellor can attribute the success to his wise stewardship. That’s why Jeremy Hunt has completely gone into horror mode this week. Tell them it’s going to be terrible and if it’s more or less okay in 18 months, he’ll get the credit.

He could then cut taxes in the run-up to the next election.

With this in mind, what should you look for? According to the forecast, the most important element is the shape of the recession next year. It looks like we will emerge from this year without a recession, because although the economy contracted in the third quarter, it could still yield some growth in the last three months of this year.

But the first half of next year doesn’t look good as energy prices, higher interest rates and a stagnant housing market will bite demand. I could see a decent uptick in the second half of 2023, if inflation and thus interest rates come down faster than expected. But let’s see what they say.

Last week’s improved US inflation numbers – and thus the prospect of their interest rates not rising as much as expected – gave Wall Street one of its best days in years, despite all the arguing over the cryptocurrency mess.

A side effect was that the dollar fell and the pound rose to $1.18, still far too low, but the highest since late August. Our ten-year gilt yields are now 3.35 percent, not much more than before the Truss-Kwarteng budget adventure.

As for expenditure, it will be a simple question, embedded in the complexity of the sheer numbers involved. Government spending for this financial year is budgeted at £1,087 billion.

That is about € 35,000 per household. The question is: what are the priorities? If you increase the state pension in line with the triple slot, what will you reduce to get money for it? Whatever you do, there will be protests. So who are you willing to upset?

As for the third element, taxation, the big issue is how much is done covertly and how much is raising taxes explicitly.

As we show today, inflation pushes people into higher tax brackets and that brings in a lot more money. Total government revenue this year is budgeted at £987bn, leaving an estimated shortfall of the nice round figure of £100bn.

Maybe stealth is best. Do you remember the famous saying of Jean-Baptiste Colbert, Louis XIV’s finance minister? It was that ‘the art of raising consists in plucking the goose in such a way that the greatest amount of feathers is obtained with the least possible hissing’.

Thursday is in full swing. But let’s try to look further, to the bright side in 2024. There is a turning point there. We just don’t know when.