This year’s Autumn Statement will take place against the most challenging economic and international backdrop in a generation and at a critical time for environmental policy.
Internationally, the UK faces rising protectionism and the risk of further energy and supply shocks from geopolitical instability. The domestic context is of sluggish growth, low productivity, the accumulated negative impact of several years of high inflation on household incomes and a tax burden at a 75 year high. Demographic pressures mean the size of the state will for some time remain higher than before the global financial crisis of 2008.
Although borrowing this year has been almost £20 billion lower than expected, economic think tanks, including the Institute for Fiscal Studies (IFS) and the Resolution Foundation, as well as the Office for Budget Responsibility (OBR), have warned about the dangers of ‘fiscal illusion’. High inflation boosts the nominal (as opposed to inflation-adjusted, or real) size of the economy, producing flattering tax receipts. But this is cancelled out by rising bond yields which increase the government’s debt interest bill. All in all, the public finances remain extremely tight and are likely to remain so in the absence of sustained economic growth.
With an election drawing near, the chancellor may want to cut taxes. This would be a mistake, as would policy that further undermines investor confidence in the UK’s energy transition.
Instead, the focus should be on pro-growth green public investment, drawing in private capital to develop sustainable industries, as laid out in our recent briefing. This may raise borrowing and debt in the short term, but it will more than pay for itself over the medium term (the course of a parliament) and in the long run through higher productivity, lower energy bills for industry and consumers, and stronger growth.
Steve Coulter, head of economy, email@example.com