The only way was up for Jeremy Hunt when he took over at the Treasury last October. Appointed by Liz Truss in an attempt to save her job, he was the fourth chancellor of 2022 and the Conservatives were at rock bottom.
The economic legacy handed to Hunt was dire. Inflation was above 10%, living standards were falling, and house prices were going down while interest rates were going up. In the aftermath of Truss’s departure from Downing Street, the Bank of England said the economy was already in recession and would remain that way for the whole of 2023. Opinion polls were pointing to a landslide victory for Labour at the next election.
But since the turn of the year, the news on the economy has been consistently better than expected. A technical recession was avoided – by the narrowest of margins – in late 2022, and since then figures for growth, the public finances, inflation and consumer spending have all been stronger than forecast. There have even been some signs in recent days that house prices may soon bottom out. Forecasters, including the Bank of England, now think the recession will be shorter and shallower than they expected last autumn. Some think there will be no recession at all.
This is obviously good news for Hunt, who would clearly prefer not to be announcing a budget with the economy in recession. The brighter economic picture has yet to lift the poll ratings for the Conservatives by much but the Labour party fears it may eventually do so. There is probably still 18 months to go before the election, and during that time inflation should continue to fall and living standards will start to pick up. Neither Sir Keir Starmer nor Rachel Reeves thinks the election is in the bag.
But Hunt, too, has his reasons to be wary. For a start, things have only improved marginally in recent months, and there is no guarantee the improvement will last. The consultancy Capital Economics estimates that only one-third of the Bank of England’s steady increase in interest rates from 0.1% to 4% since late 2021 has so far been felt.
What’s more, the better the economy does, the more chance there is of Threadneedle Street’s monetary policy committee raising borrowing costs still further. The chances are that rates will rise for an 11th consecutive meeting later this month, probably to 4.25% rather than 4.5%. And, amid evidence that some firms are gouging their customers with above-inflation price increases, the Bank will want to make sure that inflation doesn’t become embedded. Rates may be close to a peak, but they are not coming down any time soon.
Hunt doesn’t want to give the Bank any reason to tighten the screw further, which is precisely what the chancellor fears would happen if he announced big tax cuts or spending increases in the budget. In that respect, it is not entirely helpful for the chancellor that borrowing looks like coming in £30bn lower in the current financial year than the independent Office for Budget Responsibility was forecasting only four months ago. Nor that the National Institute of Economic and Social Research – one of the UK’s oldest established thinktanks – said the Treasury was on course to meet its target for controlling the size of the budget deficit with £166bn to spare.
There has been no shortage of suggestions for how Hunt should spend his windfall, and there will be money to encourage investment, ameliorate the cost of childcare for poorer households, provide further support for energy bills and freeze fuel duty for motorists. But this is not intended to be a budget that changes the big picture for the economy. Few budgets live long in the memory – and this one is unlikely to buck the trend.
Gary Lineker is currently making bigger headlines than Hunt, and from the perspective of where the government was in the autumn, that is no bad thing. After the Truss experiment, being boring has its merits.
But being boring also its drawbacks. Truss was wrong about many things, but in one important respect she was right: the economy has been underperforming since the global financial crisis of 2008. The Conservatives have been in power for all but the first two years of that period but Britain shows no real evidence of breaking out of a long period of low growth and low productivity. Making a fetish out of balancing the books hasn’t helped.
Indeed, Hunt’s safety-first approach contains economic and political risks. Fiscal policy – moves affecting taxes and spending – will be tightened in April, and with interest rates also set to rise, that means the Bank of England and the Treasury will be taking actions that will slow the economy. There is a risk that between them, Hunt and Andrew Bailey will precipitate the recession that has so far been avoided.
Hunt would argue that in a post-Truss environment, there were no good choices, and he has picked the least bad one. The plan is to be in a position to cut taxes before the election and hope for a last-minute feelgood factor.
Hunt was at pains to say during his TV appearances on Sunday that he has a plan for growth, but he will struggle to avoid the charge that what he will laud as a “back-to-work” budget seems like more of the same, and much too late to make a real difference either to the state of the economy or the way in which voters perceive the government. Starmer and Reeves are right not to be complacent. After four defeats in a row, Labour is right to be worried. But, for now, not that worried.