If the UK Economy Is Fine, Why Are People Still Pessimistic?

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Chancellor of the Exchequer Jeremy Hunt had some good news to deliver Wednesday. Inflation, which reached 11.1% in October, is now anticipated to be 2.9% at the end of the year. The economy will shrink by only 0.2% instead of the previous forecast of 1.4%. The UK has swerved a technical recession and public finances are looking tidier.

And yet, as Hunt knows, budgets are also political documents. The purpose of Wednesday’s pre-leaked budget announcement was to telegraph stability and governing competence, which it largely achieved. In fact, the longer Prime Minister Rishi Sunak is in power, the more the cult of Boris Johnson feels like a reckless affair and the brief premiership of Liz Truss like a bad dream.

But while those improving macroeconomic data points please the bean counters, what matters most when it comes to the next election will be whether people feel optimistic about their own lives. On this front, the Tories seem to be up against what Kyla Scanlon dubbed a “vibecession” — when the economy isn’t doing so badly, but people feel glum about their prospects.

The problem Hunt and Sunak have is that the numbers might be saying “we’re getting better,” but ordinary voters will be feeling something more unprintable. Indeed, half a million workers were out on strike, including teachers and doctors, as Hunt delivered his budget.

We’ve been here before. Many who have looked at the reasons behind the 2016 Brexit vote recall an anecdote in Newcastle, when King’s College Professor Anand Menon, an expert in European policy, was explaining how Brexit was likely to result in a hit to the UK’s GDP. “That’s your bloody GDP, not ours,” a voice from the audience shouted back.

Hunt, who voted to remain in the European Union but has since embraced Brexit, will know exactly the danger. People tend to vote with their guts rather than through a decision-tree process that takes forecasts and external events into account. They may follow a charismatic leader who makes them laugh or feel seen, as Boris Johnson did. They may vote against a status quo that makes them feel alienated or insecure — the allure for many Brexit voters.

The Office for Budget Responsibility notes that real household disposable income (a good proxy for living standards) is expected to fall by 5.7% over the financial years 2022-2023 and 2023-2024. That’s an improvement over the November forecast but is still the largest two-year decline since records began in the 1950s.

That’s mainly the result of the rise in energy and core goods prices. It still means real living standards are expected to be 0.4% below their pre-pandemic levels into 2027-2028, according to the OBR forecast. And others are less optimistic.

People will also face a stealth tax in the form of what’s called fiscal drag, as freezing income-tax thresholds pulls more income into the tax net. That will raise an additional £29.3 billion ($35.3 billion) a year in taxes by 2027-2028 compared with if thresholds had not been frozen, the OBR said. Among the hardest hit in a Bloomberg analysis of the impact on different taxpayer profiles was a middle-income family with two children. It also freezes the earnings threshold for repaying student debt.

It was good to see Hunt respond to the growing clamor to support childcare costs, given that the UK’s are some of the highest in in the world. But his solutions won’t necessarily have moms lining up to vote Tory. Previous state support began mostly when a child turned three (and subject to certain working conditions); that will now be extended to children over nine months of age. But it includes only 30 hours a week during term-time, leaving parents with large gaps to fill, including during the summer holidays. Both parents need to be working to claim the relief, too, which creates a Catch-22 whereby a parent has to have childcare to find a job and receive the benefit. Labour will promise something much more generous, though how it plans to pay for it will be interesting.

There is a hope that more business investment will lift growth. Maybe, but Hunt’s measure to allow 100% of expenditure on capital projects to be offset against profits is limited to only three years, which means that capital investment will be brought forward and leaves uncertainty for the future. The OBR expects growth in the capital stock per worker (which influences output forecasts) to be 0.5 percentage points lower than in November over the forecast horizon. Less of what economists call “capital deepening” means less boost to productivity growth.

A vibecession doesn’t make it entirely easy for Labour either. There are no longer grand philosophical differences, or even big policy ones, between the two major parties. The Tories have become adept at snatching Labour proposals that poll well or make sense, from windfall taxes to decentralizing government and childcare. That leaves Keir Starmer in the awkward position of having to oppose a government that is doing what Labour itself claims is needed and looking rather competent.

Still, a bad vibe tends to favor change. Hunt’s budget helps Sunak draw a line under the chaos of recent years and restore a measure of trust in the government. But to win a record fifth election, the people in the room need to feel that their GDP is going up.