The Chancellor issued a number of ominous warnings even before today’s Autumn Statement, arguing that people would have to make unpleasant sacrifices.

The “fiscal tightening” announced in the House of Commons today represents the manifestation of these grim portents. The sober, serious mood in the chamber was in stark contrast to the triumphalist atmosphere surrounding last month’s so-called ‘mini-Budget’. The hangover from this ill-fated experiment is still smarting, with inflation hitting a 41-year high in October of 11.1%, worse than many economists had expected.

The infamously image conscious Prime Minister is not blind to the reputational damage his government must repair, admitting at the G20 summit this week that the UK’s reputation has taken “a bit of a knock”.

A rude awakening

Today’s measures were all about damage control, not just for the public finances, but for the Conservative Party’s reputation. Jeremy Hunt is aiming to restore the perception that his party is rooted in sensible fiscal policy, and not obsessed with using tax cuts to signal ideological purity.

There was, however, a level of political ideology driving today’s statement. Promising to ask “challenging questions” on the reform of public services signalled consistency with the Thatcherite economic worldview of Sunak and Hunt. However, reviews of public spending still come with political risks, especially in defence as British support for Ukraine remains vital.

Most Conservatives will find today’s tax increases less easy to stomach. The increase in corporation tax to 25% was already priced in, but the Chancellor appeared uncomfortable announcing an increased windfall tax rate on oil and gas companies of 35%, and the halving of the capital gains tax allowance to £6,000. He will likely have deemed it necessary however, to balance the books.

Meanwhile, traditional Tory voter bases of pensioners and homeowners may still be feeling sore after question marks over the pensions triple lock and soaring mortgage rates. Hunt’s renewed commitment to the triple lock, telling pensioners “this government is on your side”, was a clear attempt to woo these voters back, but is this too little, too late?

Key figures to consider:

• Total public spending 2021-22: £1.1 trillion
• Estimated total GDP: £2.2 trillion
• National debt: £2.3 trillion
• Estimated annual cost of servicing public debt: £87 billion

A return to consensus?

While the Government benches were relatively subdued today, the Opposition also has some difficult straits to navigate despite its continued poll lead. The Chancellor has moved towards a number of Labour positions, notably the extension of the windfall tax, so they cannot reasonably be critical of them.

In her response today, the Shadow Chancellor Rachel Reeves criticised this government’s move to make the British public pay for the mistakes of their immediate predecessors. Chastising the Conservatives for forcing the UK economy into a “doom loop”, she reiterated Labour’s proposal for an ambitious plan for growth. This echoed the priority of her opposite number, but Reeves and Starmer will be hoping that they can back this up with their published industrial strategy.

The Tories are not the only ones looking to distance themselves from previous fiscal policy. Starmer remains determined to undo historic perceptions that Labour is a high tax, high spend party with a poor economic record. The danger is that by the next general election  Labour ceases to look as much like a clear alternative to the Tories, at least on fiscal policy. This lack of differentiation plagued Ed Miliband’s electoral prospects during the coalition years, and it may yet end up narrowing the polls again.

The contest for credibility

As both parties begin to pivot towards an election footing, they both look to undo past perceptions of their fiscal records and convince the public that they should be trusted to run the UK economy. The public will need to decide who they find more credible. Labour risk being frustrated by the short memory of the electorate if the disastrous policies of Truss and Kwarteng fade from view. The Conservatives will find themselves in the unfamiliar position of having to fight for their credibility on the economy. The next year or so will reveal which party the public trust more.

Read the Autumn Statement 2022 in full here.