We’re not in a good place. – Owl

Expanded version below:

Paul Johnson, director of the IFS, has just issued his early analysis of the autumn statement.

Johnson starts by “getting a few things straight”:

The public finances haven’t meaningfully improved. The growth outlook has weakened. Inflation is expected to stay higher for longer. Higher inflation pushes up tax receipts by more than it pushes up spending on debt interest or social security benefits.

But rather than use the proceeds to ease the ongoing ‘fiscal drag’ effects of threshold freezes, or to compensate public services for higher costs, the Chancellor opted to cut other taxes – most notably National Insurance and corporation tax.

These tax cuts won’t be enough to prevent this from being the biggest tax raising parliament in modern times.

Johnson then warns that announcing immediate and certain tax cuts in response to highly uncertain changes in assumptions about the UK’s medium-term economic prospects is “not a recipe for good management of the public finances”.

One reason the Chancellor feels he has space for tax cuts is that the forecasts have rolled forward, giving him another year to get debt falling under his fiscal rules, buying him an extra £5 billion to play with – but this hardly represents an underlying improvement in the state of things.

Spending the entirety of such a windfall, but allowing borrowing to rise when bad news comes along, is not the route to fiscal sustainability.

Johnson says the “prudent thing” would have been to build in a larger buffer into his plans, rather than only aim to meet the government’s “poorly designed, and loose” fiscal target by a tiny margin.

That’s especially true when one considers the possibility that things move against the Chancellor in the spring. But instead we got tax cuts, which will limit the room for manoeuvre for whoever is Chancellor after the next general election. That might make for good politics. It does not make for good policymaking.

Having said all that, Johnson concludes, Hunt has chosen a “pretty sensible set of taxes to cut”.

Making full expensing permanent rather than temporary is welcome, though it’s a shame there was no hint of an appetite for more structural reform. Cutting National Insurance is a good way to boost employment.

But these tax cuts have been ‘paid for’, in effect, by a bigger squeeze on the real-terms value of public service budgets and an even bigger squeeze on public investment, which is frozen in cash terms. There’s a material risk that those plans prove undeliverable and today’s tax cuts will not prove to be sustainable.”