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Politics

Is the fiscal ‘black hole’ real? We asked economists

Jeremy Hunt spoke of the need to “balance the nation’s books” ahead of his Autumn statement. Economists say that’s not necessarily the case

Jeremy Hunt’s Autumn Statement is centred around a £55bn “consolidation” of tax rises and spending cuts to deal with a so-called fiscal “black hole”

The chancellor has talked of needing to “balance the nation’s books” and take difficult decisions to deal with economic issues left by Liz Truss and Kwasi Kwarteng, as well as the rising energy bills and fallout of Brexit, the pandemic and Putin’s war in Ukraine.

For those already looking at their bank balances in despair, it’s scary language. It also — on the surface — makes sense. You can only spend as much as you make without opening yourself up to the dangers of debt. It’s been the mantra of the last 12 years: the national economy is like a household budget and we can only live within our means.

But how true is that? Has an economic star exploded?

Despite what successive Conservative chancellors have been telling us, a lot of economists disagree. The economy is not like a household budget and austerity is not the only option.

The ‘black hole’ is simply a metaphor for whether the government will hit its own targets

In basic terms, the “black hole” is just how much the government is predicted to miss its own targets rather than the kind of household debt we are brought up to avoid.

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“It’s not real in the same way rising prices or low wages are real,” says James Meadway, an economist who served as an advisor to John McDonnell. “The ‘black hole’ is something that is produced by very uncertain forecasts and the government’s own targets for the debt.

“If forecasts or the debt target changes, the ‘black hole’ also changes – and potentially even disappears.”

Economic forecasts are produced by the Office for Budget Responsibility, which makes an assessment of whether the government will hit its own “fiscal rules”. The government responds to these and decides what to do. These measures usually form a large part of a chancellor’s budget plans.

“Normally the government then adjusts taxes or spending to ensure its rules are met,” says Simon Wren-Lewis, professor of economic policy at Oxford University.

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The government could miss its targets

The targets aren’t laws of nature. The government could actually miss its fiscal rules and it would not ruin the country. If it did so for a good reason, such as an impending recession, Wren-Lewis says “in my view nothing would happen.”

“If it’s a reason which increases uncertainty about the economy and interest rates, as in the Kwarteng fiscal event, then there could be some negative market reaction.”

The language around a “black hole” is misleading, says Wren-Lewis “because it suggests these rules are somehow natural rather than the choice of governments”. Instead of a black hole, we should talk about the government’s targets themselves, rather than taking it as a given that they need to be met. 

Meadway expands: “The targets are pretty arbitrary – the government wants to be able to say to people lending it money that it has a plan to keep debt under control.”

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The government could pick other targets

So what else could be done? Are the choices made in Hunt’s Autumn Statement as natural as choosing to pull your parachute while plummeting to the ground?

“There’s no good reason to pick this specific target of debt falling compared to GDP in five years’ time, and many economists would argue there are other targets to pick – for instance, one further into the future, or one allowing plenty of borrowing for long term investments like renewable energy,” says Meadway.

There are also other alternatives, says Dr George Dibb, head of IPPR’s Centre for Economic Justice.

“Making cuts to public services and harming our prospects of growth just to close a hole of your own creation is short-sighted,” Dibb told The Big Issue. 

“Of course the government needs a solid plan for sustainable borrowing and spending, but the most fiscally responsible thing to do would be to protect vulnerable households from the cost of living crisis and to shorten a potential recession by investing in growth.”

Read more of the Big Issue’s coverage of inflation and the Autumn Statement:

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