The Observer view on the budget: Jeremy Hunt is planning to steal from our long-term future

<span>Chancellor Jeremy Hunt intends to slash public investment by severing the link with inflation.</span><span>Photograph: Victoria Jones/PA</span>
Chancellor Jeremy Hunt intends to slash public investment by severing the link with inflation.Photograph: Victoria Jones/PA

Jeremy Hunt should be honest with MPs and the British public when he delivers his budget on Wednesday. Early in his speech, the chancellor should admit that almost 14 years of successive Conservative administrations have left the economy and the public finances in a far worse position than many of our competitors among the other major industrialised nations.

There is the proliferation of food banks and the growing number of homeless people sleeping in shop doorways, alleys and in the woods on the edge of town. Hundreds of schools cannot cope with the growing numbers of pupils who struggle to learn. Local authorities are running out of cash at an alarming rate, and hospital, GP and dentistry services have narrowed the scope of who they cater for and many are dealing only with emergency cases. The police services are struggling, the asylum system remains a shambles, and prison governors complain that the ageing infrastructure and poorly paid staff mean they barely look after the number of prisoners in their care.

Then there are the subjects Hunt has indicated he will not talk about. There will be no mention of Brexit or of the escalating demands placed on the armed services. Yet it must be incumbent on the chancellor to say how the government will account for the extra funds needed to support the Ukraine war effort. There is cash in the pipeline, but not nearly enough to fund participation in eastern Europe and the Middle East conflicts.

On a purely practical level, the UK is among the many countries facing difficulties providing extra ammunition to Ukraine. To answer the call, the UK needs to ramp up production, just as others must, and Hunt should lay out plans showing how this can be achieved. One of the main reasons Hunt has limited funds to revive public services is the lack of growth in the economy and a fiscal rule that limits his borrowing to fund long-term projects. A misguided programme of austerity since 2010 has not only denied the public realm vital funds, it has undermined the growth potential of the private sector.

Hunt's approach robs the private sector of the certainty that state investment spending provides over the longer term

Dogma at the heart of Conservative thinking determines that the public sector needs to be cleared out of the way to allow the private sector to thrive. This theory insists that investment by public-sector organisations crowds out the private sector, when all the academic research shows public funding underpins private investment. In essence, private-sector businesses piggy back on university research, state subsidies for skills training and the major infrastructure projects that provide the backbone of a modern economy. Academic studies show how technological breakthroughs in the modern era depend on public investment, sometimes oblique, but always crucial. That goes for the US as much as it does in Europe and Japan.

Hunt intends to slash public investment over the next five years in his budget plans by severing the link with inflation. Without inflation proofing, he will be guilty of stealing money from the UK’s future to fund tax cuts this year and next.

The Institute for Fiscal Studies (IFS) said in its analysis of what to expect from Hunt’s budget that maintaining investment at its current share of national income, or gross domestic product, in 2028–29 would require an additional £20bn of spending.

Hunt’s is a disastrous policy that mimics those of his Tory predecessors, who have regularly cut public investment to offer sweeteners when an election nears. A fiscal rule that forces the chancellor to bring down the UK debt-to-GDP ratio in the final year of a five-year forecast also plays a part in damaging the economic outlook. Hemmed in by the rule, Hunt must adhere to a stop-start five-year spending programme – one that is allowed to increase for four years before being reined in during the fifth. It is an approach that fosters short-termism and robs the private sector of the certainty that state investment spending provides over the longer term, underpinning economic progress.

Financial markets that panicked in 2022 when Liz Truss said she planned to borrow more to fund tax cuts would be sanguine about Hunt devoting funds for investment. Investors want to put their money into economies with long-term prospects rather than those that appear to be snatching at quick fixes and easy wins that lack any foundation in even the most basic economic textbooks.

Married to a squeeze on investment are cuts to day-to-day spending of government departments. The IFS said that, while the outlay on public services is on course to rise by £17bn up to 2029 – after adjusting for inflation, and for funds earmarked for the NHS, childcare, schools, defence and overseas aid – other areas of government would face real-terms cuts of £18bn over the same period. An £18bn cut in unprotected department budgets and a £20bn cut in investment is widely thought to be unrealistic, which gives rise to the understandable claim that Hunt, for all his talk of the long term, is preparing to scorch the earth Labour inherits, should it take power after the election. Such huge cuts will need to be reinstated by whichever party takes over. But with economic growth stagnant, interest rates high and inflation falling slowly, the next government will find it has only meagre funds to mount a rescue operation.

Labour’s Rachel Reeves says her plans to revive growth will provide her with the funds necessary to begin a repair job. It’s an assessment that, like Hunt’s, lacks the much needed honesty the public deserves. Let’s hope both will come clean about what lies ahead.