Why Autumn Statement was more symbolic than significant as Scotland perspective looks even worse - John McLaren

When all is said and done, and despite 110 measures to improve economic performance, not that much happened in the Autumn Statement and for good reason.

The Chancellor was hemmed in from all sides, making any room for manoeuvre more symbolic than significant.

Public service spending remains way above pre-Covid levels, yet key public services – like the NHS, schools and the justice system – are struggling to deal with the extra burdens inherited from the pandemic.

Hide Ad
Hide Ad

Meanwhile the UK economy continues to stagnate, meaning that taxes need to rise in order to cover the increased spending burden.

Grangemouth is Scotland's only oil refinery and its closure looms as an economic blow for the Scottish Government, writes John McLarenGrangemouth is Scotland's only oil refinery and its closure looms as an economic blow for the Scottish Government, writes John McLaren
Grangemouth is Scotland's only oil refinery and its closure looms as an economic blow for the Scottish Government, writes John McLaren

At a time of high inflation this can be done surreptitiously, by freezing tax thresholds and letting fiscal drag do its job, rather than raising actual rates.

With debt approaching 100 per cent of national income and historically high interest payments on it, then further tax hikes is the only credible way to pay for such levels of government expenditure.

That is how we find ourselves with the highest tax burden – even after yesterday’s national insurance cuts – for 70 years, not through choice, but necessity.

The Chancellor managed to tweak taxes down, but its scraps for the public and politicians to chew on, as he knows those on the right of his party cannot be pandered to.

Firstly, because if a large, unfunded, tax cut were delivered then we are back to a Liz Truss-style crisis situation, as it is unrealistic.

Secondly, because he has banged on for some time now that he doesn’t want to re-stoke inflation with consumer boosting tax cuts.

Recent claims by Treasury ministers the economic situation has dramatically changed, as a result of Octobers fall in inflation, are risible as core inflation – i.e. excluding erratic elements like food and energy prices – remains close to 6 per cent and services inflation well above it. The Governor of the Bank of England pretty much called out such an interpretation earlier in the week.

Hide Ad
Hide Ad

The really worrying aspect of all this is that high inflation would normally be associated with a runaway economy, not a moribund one, which suggests that a non-inflationary growth rate for the UK economy is now close to zero.

The solution to the conundrum outlined above is a return of decent rates of productivity growth. But how?

Some strategic spend on infrastructure and green and AI-related investments would help, along with getting more people back to work, post-Covid.

So too would encouraging private companies to invest more and easing planning regulations in order to speed up infrastructure and housing projects.

In the Chancellor’s defence, he took some positive steps in these directions in his statement, but this is likely to be a slow process of small gains, no big bang and, let’s be honest, such low key, sustained, policy measures are not exactly the forte of UK, or Scottish, governments.

Furthermore, the Office for Budget Responsibility (OBR) gave its judgement on the impact of such measures on productivity yesterday, which was – not much, about 0.3 per cent in five years.

The sting in the tail was that, with others factors slowing economic growth, the OBR has downgraded its overall medium-term growth prospects for productivity and for potential economic output.

In terms of keeping a lid on public spending and on taxes, the medium-term position looks even worse than the short-term one.

Hide Ad
Hide Ad

As respected think-tanks like the Resolution Foundation and the Institute for Fiscal Studies (IFS) have commented, the spending plans pencilled in for the next UK parliamentary term are “a fiscal fiction”, implying an unrealistic return to austerity for many high-profile spending departments.

They will, without doubt, be topped up and, barring any economic jump start, likely require tax hikes to fund them.

All this makes Rishi Sunak’s stated ambition from last year of cutting the basic rate of income tax from 20p to 16p, by the end of the next Parliament, a total nonsense.

The key problem is that we have a sclerotic economy alongside an ageing population that has rising public spending needs and that both issues have been exacerbated by the effects and aftermath of Covid.

The latter may ebb away, but not for some time. The former has been around for long enough to be considered near to normal.

The position is little different in Scotland indeed, if anything, worse. The Scottish economy has historically tended to underperform the UK economy and the Scottish Government has even higher spending pledges to fund, in particular in relation to devolved benefits payments like child benefit.

Humza Yousaf may not have to deal with pressure for tax cuts from within his own party, but equally his tax raising options are much narrower compared to Sunak’s, with income tax being the main, blunt, instrument available to crack a series of hard nuts.

All of this before yesterday’s ominous announcement by Ineos/Petrochina about the future prospects for Grangemouth.

Hide Ad
Hide Ad

While details remain vague, and its influence on the Scottish economy as a whole can be exaggerated, the impact on the local economy and on current suppliers of a partial or full closure could be calamitous.

This would put pressure on the Scottish economy to intervene in some way, which they have in the past although not with a great record of success, and which could have financial ramifications.

Meanwhile, back in Westminster, the slow dismemberment of the latest fiscal statement will continue in the coming days but, hey, if you didn't like this one, don’t worry, there’ll be another one along in about four months.

- John McLaren is a political economist who has worked in the Treasury, the Scottish Office and for a variety of economic think-tanks

Comments

 0 comments

Want to join the conversation? Please or to comment on this article.