The spring statement might not be the hero-to-zero moment Rishi Sunak expects

Vince Cable was warning about excessive consumer debt years before anyone else tumbled to the problem. In November 2003 he challenged the then-chancellor Gordon Brown about “the brutal truth” that “the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level”.

As a result he gained “economic guru” status, though this has been frequently challenged. Owl, certainly, would be critical of the central role he played in introducing Local Enterprise Partnerships.

Here is his view tomorrow’s (Wednesday) Spring Statement:

Vince Cable

Most politicians encounter a hero-to-zero moment (I speak from experience). I suspect Rishi Sunak may be bracing himself for one now, as he approaches Wednesday’s spring statement. But he should not lose hope.

Even before the Russians invaded Ukraine, the outlook was uncomfortable: 5 per cent consumer inflation; a big rise in the energy price cap; a rise in National Insurance to pay for spending on the NHS and care. The latest YouGov survey of 6,000 households shows consumer confidence to be at its lowest level since records began over a decade ago.

The war makes that outlook even worse. There is much uncertainty about how much further punitive measures against Russia may go but supply disruptions and sanctions amount to a big global tax on oil and gas, cereals, fertilisers and several key metals. The effect will be to aggravate “stagflation”: pushing up costs and prices while simultaneously depressing demand.

The geo-political earthquake in Ukraine will generate an economic tsunami, sweeping away comforts and orthodoxies with which we have become familiar in recent decades. We don’t yet know the height of the waves, but we know they are on their way.

The era of low interest rates is first to go. Central Banks, including our Bank of England, are getting alarmed about inflation and moving to higher rates, which further depresses consumer demand and investment. Despite rate rises, some forecasters believe the UK could hit 10 per cent inflation by the end of the year and be in recession.

Given chronic uncertainty, and his very public commitment not to undermine the public finances, there is a strong temptation for Mr Sunak to do as little as possible. But then he runs the risk of doing too little, too late, since tax and spend measures operate with a time lag. The tax tap takes a long time to run hot; the spending tap takes a long time to shut off. He is also in a stronger position to be generous than he might appear, with government borrowing running £25billion below expected levels.

The Chancellor will make a lot of the rising interest cost of servicing government debt as a justification for not doing more to cut taxes or increase spending. That would however be a poor excuse. Only about a fifth of government debt is linked to inflation, and the costs of new borrowing are negative in real terms. The level of government debt to GDP is expected to be shown in the budget statement as falling and is not high in historical terms, against the background of war and pandemic.

Sunak’s guilty secret is that higher inflation will actually help the Treasury in budgetary terms. Income tax is set to rise because tax thresholds are being eroded in value by rising prices: so-called “fiscal drag”. And public spending is squeezed in real terms because departmental spending has been fixed in cash terms over several years. Inflation tax is a big earner.

For that reason, I would expect the Chancellor to make some crowd-pleasing gestures after all. There are strong but competing demands to ease the pain of the current “cost of living crisis”. The best option is to concentrate resources on low-income households who are the main sufferers from high domestic energy and food costs. The most obvious step would be to increase universal credit (and pensions) beyond the 3.1 per cent uplift currently planned. The OECD has urged its members, including Britain, to use their “fiscal firepower” to protect the poorest in society, helping them pay their bills for essentials.

A more politically-popular measure with Conservative MPs would be to cut fuel duty. In remote and rural areas without public transport, there is a real issue. But a policy which provides the biggest help to motorists with gas-guzzlers flies in the face of environmental commitments. The same could be said of a cut in the 5 per cent VAT rate on energy – though it would directly help fuel-poor households with gas and electricity bills.

Meanwhile, although an across-the-board cut in VAT tends to benefit big spenders most, it has both political and economic appeal. Taking VAT temporarily down to 17.5 per cent would be simultaneously disinflationary (slowing the rate of inflation) and reflationary (stimulating spending), offsetting stagflation directly.

The Chancellor will also be expected to boost defence spending and ease the pain of energy intensive industries. And, although he is not relenting on his ill-advised increase in National Insurance rates, he could soften the impact on low earners by lifting the NIC threshold (perhaps with a simultaneous increase in the “cap” at which higher earners stop making NI contributions).

Finally, there are some tax increases which would be popular – not least taxing windfall profits from North Sea oil, despite the risk of suppressing investment in increased production and domestic energy security.

By combining tax hikes on the corporate bogeymen with some spending on a hard-pressed public, Mr Sunak may not hold on to his “hero” status, but he could prove he has some way to go before reaching zero.

Sir Vince Cable’s podcast, Cable Comments with Vince Cable, is available here