This Autumn Statement will hurt. The alternative would be far worse

At the T20 World Cup final, a fan held up a sign declaring: “I love Rishi Sunak.” Perhaps the supporter enjoyed the squeeze applied by England’s bowlers, or appreciated the cuts played by the batsmen. But in Downing Street, there is realism that the Autumn Statement on Thursday will bring the Prime Minister little love.

Instead, the watchword is competence, and here Sunak confronts two serious challenges: the stream of migrants crossing the Channel and the dire economic situation. The economy is shrinking, interest rates are rising, the Bank of England predicts a two-year recession, there is a £55 billion shortfall in the public finances, and inflation, depending on how we count it, is running at between 8 and 12 per cent.

And so we face a painful squeeze. Departmental spending will be held down below inflation, and taxes will rise. Some compare the situation with 2010, when David Cameron and George Osborne began what they called the “age of austerity”, but there are important differences between now and then.

First, Cameron and Osborne had spent two years arguing that spending cuts were necessary, and even Alistair Darling, then Labour’s chancellor, accepted something similar. Now, the Prime Minister and his Chancellor, Jeremy Hunt, have had little time to prepare the public for the pain that is coming.

Second, the dynamics were different in 2010. Then, there was a new Conservative-led government that could, with justification, blame the cuts on “Labour’s debt crisis”, but now, the Tories have been in office for 12 years. Then, ministers worried about unemployment as well as borrowing, whereas now they worry most about inflation. And then we were responding to events set off by the financial crash – a single crisis. Now, we face the combined effects of the pandemic and the energy crunch caused by war in Ukraine – all while our stock of debt is high after facing consecutive crises.

The third difference, of course, is that we have already been through austerity. Some may say this only proves big cuts are possible. But many budgets – not least for local government – have already been cut to the bone. Even budgets that were protected – health in particular – saw rising demand mean effective spending cuts. Nobody believes it is impossible to root out waste and run services more efficiently, but the necessary reforms take time and often upfront investment spending that releases savings later.

So, there are significant choices to be made. Sunak and Hunt will need to decide on the balance between cutting spending and increasing taxes. While Cameron and Osborne opted for a cuts-to-tax ratio of 80:20, government insiders expect the ratio this time to be about 50:50.

And who pays for what is another big decision? Hunt has made much of his determination to protect the most vulnerable, and that those most able to pay more will be asked to do so. But there is no escaping the fact that we will all end up with higher tax bills, through fiscal drag, reduced thresholds and other changes.

And there will be choices to be made about spending too. It would be surprising if all investment spending evaded the Treasury’s searchlight, but it would also be self-defeating to cut the programmes that will aid future growth. Equally, while there is a case for reforming the NHS, Sunak and Hunt will have to protect its budget as far as possible at a time of rising demand and unprecedented pressures on its services.

Nobody wants to see taxes rise and spending cut, least of all a new PM and Chancellor who face an election in two years. But this is the reality we face, and Sunak and Hunt have concluded that the foundation of future economic reform must be sound money. The political divides may appear to be about whether the squeeze should happen or not, but the honest way of putting it is whether we confront reality or deny it.

On the Tory benches, some complain that taxes are already too high. But the facts matter. Our ageing society means greater demand for pension payments and health and social care services. The post-pandemic increase in sickness benefits and early retirements, and a reduced number of available workers, has its costs. The cost of the pandemic and energy bailouts means we have a huge stock of debt, and American interest rates are increasing borrowing costs worldwide.

Britain tried to ignore these facts when Liz Truss introduced her mini-Budget – and the consequences were disastrous. Labour, too, will want to avoid the facts. The squeeze announced by Hunt on Thursday will run beyond the next election. Sir Keir Starmer will simply blame the Tories for the squeeze, but soon it will be untenable to avoid saying what he would do. There is not a single area of spending where Labour’s answer is to spend less or even the same as the Government, and they remain silent about their tax policies. Fiscal policy, he must soon admit, is all about trade-offs.

There is no greater trade-off than the painful price of getting inflation down, and the even more painful and longer-lasting price of lacking the stomach to do what it takes. Higher taxes are announced in the House of Commons and published in Treasury documents; inflation is the thief in the night that reduces our salaries and savings and makes it harder to provide for our families.

This is why, in the short-term, Sunak and Hunt must take on inflation. But we need to be honest with ourselves and ask why we have experienced repeat crises, each costing record sums to fix, and why we lack the resilience and strength to withstand them. Our economy is too unbalanced, too exposed to instability and risk, and too dependent on too few to prosper.

Stabilisation cannot come at the expense of long-term reform. We need a plan that improves skills and productivity, prizes investment, tech and automation, and allows us to increase domestic production, export more and narrow the trade deficit. That will take years to achieve, but even amid a crisis, we can – by avoiding mistakes and investing and reforming where possible – start the journey right now.