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Jeremy Hunt has been chancellor for a little over a year. He is not at fault for the overall record of the Conservatives in government: after all, he is the seventh chancellor in the past 13 years. He has, however, been lucky. It is good to be a lucky chancellor. But his successors are likely to be rather less so.

True, the “cost of living crisis” is the other side of the source of his luck, which is unexpectedly high inflation. The government has, as a result, obtained unexpectedly large amounts of wriggle room. This has allowed Hunt to tell a story about “tax cuts”, when the reality remains one of large long-term tax increases. This time, the main “cuts” were in national insurance. In next year’s Budget, presumably, they will be in income tax.

The central point made by the Office for Budget Responsibility in its evaluation of Hunt’s fiscal windfall, is that it is “mainly due to the Chancellor’s decision to leave departmental spending broadly unchanged that higher inflation and other forecast changes reduce borrowing by £27bn in 2027-28 compared to our March forecast”. It said the “Chancellor spends this windfall on cuts in national insurance contributions, permanent upfront tax write-offs for business investment and a package of welfare reforms, which together provide a modest boost to output of 0.3 per cent in five years”. Moreover, Hunt meets his target of getting debt to fall as a share of GDP in five years’ time by an “enhanced margin” of £13bn, though even this is mainly because another year is added to the forecast. That enhanced margin is presumably to be used in the Budget.

We can think of this in a more revealing way. The government has presided over an economy with weak growth. But it is subject to fierce pressures for higher public spending. Assume, then, that inflation had remained at 2 per cent a year. In order to get room to “cut” taxes, the government would have had to cut spending in nominal terms. To say the least, that would have been hard to do. In such a persistently low inflation world, it would also have been impossible for “fiscal drag” — in other words, concealed tax increases — to raise the tax burden as it has. That would have needed explicit rises in tax rates or reductions in tax thresholds. Inflation can be beneficial to governments, since it lets them exploit nominal rigidities in the system. An alternative way of saying the same thing is that it lets them cheat.

According to the OBR, the ratio of tax revenue to GDP will be 37.4 per cent in 2027-28. Without the tax measures introduced this week, it would have been 38.1 per cent. This difference of 0.7 per cent of GDP reflects Hunt’s “giveaways”, mainly his tax cuts. But the 37.4 per cent forecast is still higher than the 37.0 per cent in the OBR’s restatement of last March’s forecast. It must also be contrasted with the 33.1 per cent in 2019-20, when this parliament was elected. This has been a tax-raising parliament on a grand scale.

Moreover, the OBR forecast, based on stated policies, is that the share of public spending in GDP will decline from 45.1 per cent in the 2022-23 financial year to 42.9 per cent in 2027-28. That would be smaller than the squeeze in the 2010s. But it would still be sizeable. Public services are labour-intensive. It has always proved hard to raise productivity sharply in such activities. Moreover, public sector wages and social benefits will also tend to rise in line with incomes in the wider economy. Given an ageing population and the need to spend more on defence, planned reductions in spending as a share of GDP will be hard indeed to sustain. Pretending to deliver what will not be delivered is just another way of cheating.

Will “cuts” at least bring big political dividends? It seems unlikely, given the inflation and consequent squeeze on real spending and hidden tax increases that have created room for them. The biggest problem the government faces, however, is the poor performance of the economy in the long run.

The chancellor boasted that “since 2010, we have presided over faster growth than many of our major competitors including Spain, Italy, France, Germany or Japan”.

That is doubly misleading. First, aggregate GDP is not what matters; what does is GDP per head. Second, what matters most is the absolute rise in living standards, not performance relative to other poorly performing countries (such as crisis-hit members of the eurozone). According to the IMF, real GDP per head will rise by 10 per cent in the UK between 2010 and 2023 — an annual rate of 0.7 per cent. On this more relevant measure, Germany, Spain and Japan did better than the UK and France only slightly worse.

The chancellor also stated that the “110 measures I take today help close that gap by boosting business investment by £20bn a year. They unlock investment with supply side reforms that back British business in the following areas.” Some of these changes, such as the expensing of business investment, support for innovation and reforms to pensions, have much to recommend them.

Yet the OBR, probably rightly, is largely unmoved. It remarks that “we now expect the economy to grow more slowly over the forecast period, leaving the level of real GDP only ½ a per cent higher in the medium term than in our March forecast”. In other words, the UK is expected to remain on a relatively weak growth trajectory. This is not that surprising: it is hard to link such measures to improved growth. Even a £20bn increase in business investment would leave its level low by the standards of similar countries. The challenge of accelerating growth remains, alas, unsolved.

martin.wolf@ft.com

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