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Chancellor of the Exchequer Jeremy Hunt had good news to deliver on Wednesday. Inflation, which reached 11.1% in October, is now expected to end the year at 2.9%. Instead of the previous forecast of 1.4%, the economy will only shrink by 0.2%. The UK has weathered a technical recession and public finances are looking better.
And yet, as Hunt knows, budgets are also political documents. The purpose of Wednesday’s pre-leaked budget announcement was to telegraph stability and governance, which has largely been achieved. The longer Prime Minister Rishi Sunak stays in power, the more the Boris Johnson cult feels like a reckless affair and Liz Truss’ brief premiership feels like a bad dream.
But while those who improve macroeconomic data points please the bean counters, what will matter most in the next election is whether people are optimistic about their own lives. On that front, the Tories appear to be facing what Kyla Scanlon called a “vibecession” – when the economy isn’t so bad but people are gloomy about their prospects.
The problem Hunt and Sunak have is that the numbers might say, “We’re getting better,” but ordinary voters will feel something more indescribable. In fact, half a million workers, including teachers and doctors, went on strike when Hunt presented his budget.
We’ve been here before. Many who have pondered the rationale for the 2016 Brexit vote will recall an anecdote in Newcastle, when Professor Anand Menon of King’s College, an expert on European politics, explained how Brexit is likely to take a hit to the country’s GDP United Kingdom would lead. “That’s your fucking GDP, not ours,” a voice from the audience called back.
Hunt, who voted to remain in the European Union but has since backed Brexit, will be acutely aware of the danger. People tend to vote with their gut rather than through a decision tree process that takes forecasts and external events into account. They may follow a charismatic leader who makes them laugh or make them feel seen, like Boris Johnson did. They can vote against a status quo that alienates them or makes them insecure – the appeal for many Brexit voters.
The Office for Household Responsibility notes that household real disposable income (a good indicator of living standards) is projected to fall by 5.7% in fiscal years 2022-2023 and 2023-2024. That’s an improvement on the November forecast, but still the largest two-year decline since records began in the 1950s.
This is mainly due to the rise in energy and core goods prices. This still means real living standards are projected to be 0.4% below pre-pandemic levels by 2027-2028, according to the OBR forecast. And others are less optimistic.
People will also face a hidden tax in the form of a so-called fiscal burden as freezing income tax thresholds pulls more income into the tax net. This will bring in additional taxes of £29.3 billion ($35.3 billion) a year through 2027-2028 compared to if the thresholds had not been frozen, the OBR said. One of the hardest hit in a Bloomberg analysis of the impact on various taxpayer profiles was a middle-income family with two children. It also freezes the income limit for student debt repayments.
It was good to see Hunt responding to a growing call to support childcare costs, as childcare costs in the UK are among the highest in the world. But his solutions won’t necessarily result in mothers lining up to vote for Tory. Previous state support mostly started when a child turned three years old (and under certain working conditions); this is now being extended to children over nine months. But it only covers 30 hours a week during term time, leaving parents with big gaps to fill, even during summer vacation. Both parents must also work to claim the relief, creating a catch-22 where one parent must have childcare to find a job and receive the benefit. Labor will promise something much more generous, although it will be interesting to see how they intend to pay for it.
There is hope that more corporate investment will boost growth. Maybe, but Hunt’s policy of allowing spending on capital projects to be 100% offset against profits is limited to just three years, meaning investments are being pushed forward and the future is uncertain. The OBR expects growth in capital stock per employee (which affects output forecasts) to be 0.5 percentage point lower than in November over the forecast period. Less of what economists call “capital deepening” means less boost to productivity growth.
Vibecession doesn’t make life easy for Labor either. There are no longer any major philosophical or even political differences between the two major parties. The Tories have become adept at snapping up Labor proposals that make good or sense, from windfall taxes to decentralization of government and childcare. That puts Keir Starmer in the awkward position of having to defy a government that does what Labor itself thinks it needs to do and looks fairly competent.
Still, a bad mood tends to encourage change. Hunt’s budget is helping Sunak put an end to the chaos of recent years and restore some confidence in the government. But to win a record fifth election, people in the room need to feel their GDP is increasing.
More from the Bloomberg Opinion:
• Jeremy Hunt’s British budget is a minimalist masterclass: Marcus Ashworth
• Should the government spend your retirement savings?: Merryn Somerset Webb
• Gary Lineker scores a hat-trick from his ` series: Therese Raphael
–Assisted by Elaine He.
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Therese Raphael is a columnist for Bloomberg Opinion covering healthcare and UK politics. She was previously a contributing editor to the Wall Street Journal Europe.
For more stories like this, visit bloomberg.com/opinion
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