Imposing austerity now, in the form of higher taxes, would be completely unnecessary and even counter-productive
On November 17th the Government needs to deliver a winning budget. They may choose to call it an Autumn Statement, but it will be one of the most important budgets I have witnessed. It will need to bring spending and taxing decisions together, show sensible control of future borrowing, and provide the Office of Budget Responsibility forecasts which have a big impact on the budget decisions.
The choices before the Chancellor are not easy, thanks to a sharp deterioration in the world outlook. High inflation was made worse by the Russian disruption of energy markets through its brutal invasion of Ukraine, compounding the grievous policy errors of leading Central Banks printing too much money and keeping rates too low for too long. The new monetary stringency and the big hit to people’s spending power from high energy prices means most economies will enter a downturn into next year. There is no short term option to borrow less.
The Government either consciously borrows a bit more to pay the inflationary bills and offset some of the damage to people’s incomes, or it follows a policy of tax rises and spending cuts that will deepen and lengthen the downturn. Bad recessions always lead to much higher deficits from the loss of tax revenues from lost jobs, lower profits and fewer transactions.
It is mainstream economic advice to say government should not impose austerity going into a downturn because that will make it worse. Seeking to offset some of the impact of high energy prices and higher interest rates makes sense both to ease the squeeze on people and to contain the borrowing needs. The problem the Government faces is the continued use of the old Maastricht economic management control of state debt as a percentage of GDP, a control currently effectively suspended in the EU itself.