How to measure the success (or otherwise) of the Autumn Statement

AJ Bell press comment – 14 November 2022

“Chancellor of the Exchequer Jeremy Hunt could be forgiven for viewing the ultimate success or failure of the fiscal policies outlined in the Autumn Statement in terms of votes, as his political career rests upon the ballot box, but financial markets will look toward gilt yields and sterling and consumers and voters will look toward inflation and unemployment,” says AJ Bell investment director, Russ Mould. “Mr Hunt may be tempted to argue that he is off to a good start. Labour’s lead in the opinion polls is down (although it is still huge), government bond yields are down, and sterling is up compared to the worst of the panic caused by Trussonomics, but voters will be looking for the foundations of a sound, long-term plan and economist Arthur Okun’s Misery Index could be a useful tool to measure any progress here.

“Jeremy Hunt is the twentieth Chancellor of the Exchequer since the inception of the FTSE All-Share index in 1962. Whether he will match Gordon Brown for longevity remains to be seen, as the Labour chancellor held office for 3,708 days from 1997 to 2007, but he will certainly be hopeful of outlasting his Conservative predecessor, Kwasi Kwarteng, who managed just 38 days – Hunt will achieve that feat as of 21 November.

“Fourteen of Mr Hunt’s predecessors have been Conservative and five Labour, so the public has, so far, preferred to have the Tories in office and in charge of the nation’s finances.

			Nominal capital return
Party	Chancellor	Tenure	FTSE All-Share
Conservative	Nigel Lawson	1983-89	144.4%
Labour	Denis Healey	1974-79	101.5%
Labour	Gordon Brown	1997-2007	58.9%
Conservative	Sir Geoffrey Howe	1979-83	56.4%
Conservative	Ken Clarke	1993-97	51.8%
Conservative	Norman Lamont	1990-93	36.4%
Conservative	George Osborne	2010-16	31.3%
Conservative	Reginald Maudling	1962-64	20.5%
Labour	James Callaghan	1964-67	17.2%
Conservative	Philip Hammond	2016-19	14.3%
Conservative	Anthony Barber	1970-74	8.1%
Conservative	Nadhim Zahawi	2022	3.4%
Conservative	Sajid Javid	2019-20	2.2%
Labour	Roy Jenkins	1967-70	1.5%
Conservative	Ian Macleod	1970	1.6%
Conservative	John Major	1989-90	(3.4%)
Conservative	Kwasi Kwarteng	2022	(6.3%)
Conservative	Rishi Sunak	2020-22	(6.9%)
Labour	Alistair Darling	2007-10	(18.1%)

Source: Refinitiv data, www.gov.uk.

“At first glance, from the narrow perspective of investment, there is little in it between the two parties’ financial stewardship.

“Under Conservative Chancellors, the FTSE All-Share has chalked up a total capital gain of 354%, in nominal terms. That equates to an average advance per chancellor of 27% and the average is dragged down by the short tenure of both Nadhim Zahawi and Kwasi Kwarteng.

“Under Labour the benchmark has risen by 161% for an average gain of 32.2%.

“Across 36 years of Tory chancellorships that is a compound annual growth rate (CAGR) of 4.3% against 4.1% under 24 years of Labour in 11 Downing Street and two of the top-five best spells under a single chancellor come under Labour, again in nominal terms.

FTSE All-Share performance by Chancellor of the Exchequer in nominal terms

FTSE All-Share change by chancellor's term in office
			Nominal	Real
Conservative	Average gain		27.0%	10.7%
Labour	Average gain		32.2%	(4.0%)
Conservative	CAGR*		4.3%	2.5%
Labour	CAGR*		4.1%	(0.2%)

Source: Refinitiv data, www.gov.uk. * Compound annual growth rate

“However, the picture changes profoundly when inflation is taken into account and capital returns from the FTSE All-Share are assessed in real (post-inflation) terms rather than nominal ones.

“Here, Conservative chancellors come out well on top, as the withering effect of inflation upon investors’ returns from the stock market under Labour’s Healey chancellorship of the mid-to-late 1970s comes into play, even if Labour supporters will argue his record is tarnished by the need to tackle the mess left behind by the Conservatives’ Anthony Barber’s crack-up boom and the oil price spike of the early seventies.

“The Barber boom and its legacy was one reason why the Truss-Kwarteng mini-budget frightened markets, as inflation was already lofty before the stimulatory, tax-cutting plan, which conjured up the spectre of more inflation and faster interest rate increases, even as the economy potentially slowed.

“From the narrow perspective of investors, inflation also chewed up the nominal gains made by the FTSE All-Share under Mr Barber (and under one of his Conservative successors, Geoffrey Howe, for that matter).

FTSE All-Share performance by Chancellor of the Exchequer in real, capital terms

			Real capital return
Party	Chancellor	Tenure	FTSE All-Share
Conservative	Nigel Lawson	1983-89	105.9%
Conservative	Ken Clarke	1993-97	40.6%
Conservative	Norman Lamont	1990-93	27.8%
Labour	Gordon Brown	1997-2007	26.8%
Conservative	Reginald Maudling	1962-64	14.6%
Conservative	George Osborne	2010-16	13.5%
Labour	James Callaghan	1964-67	6.1%
Conservative	Philip Hammond	2016-19	4.4%
Conservative	Nadhim Zahawi	2022	2.8%
Conservative	Sir Geoffrey Howe	1979-83	1.4%
Conservative	Sajid Javid	2019-20	1.4%
Conservative	Ian Macleod	1970	1.1%
Labour	Denis Healey	1974-79	(8.9%)
Labour	Roy Jenkins	1967-70	(18.0%)
Conservative	John Major	1989-90	(14.1%)
Conservative	Rishi Sunak	2020-22	(24.4%)
Labour	Alistair Darling	2007-10	(26.0%)
Conservative	Anthony Barber	1970-74	(31.7%)
Conservative	Kwasi Kwarteng	2022	n/a

Source: Refinitiv data, www.gov.uk. *Compound annual growth rate

“Investors could therefore be forgiven for wishing Mr Hunt to look back to, and learn from, the experiences of both Barber and Healey as, helped by the Bank of England, he attempts to steer the economy between the twin threats of inflation on one side and recession on the other.

“The economist Arthur Okun’s Misery Index could be a useful way of gauging the chancellor’s progress.

“It simply adds together the prevailing rate of inflation to the prevailing rate of unemployment, to remind all that full employment is no guarantee of content if there is inflation and that low inflation is no guarantee of happiness (or political success) if unemployment is high.

“The Misery index, based on the last published unemployment rate of 3.5% and the last retail price index inflation reading of 12.4%, is 15.5% (RPI is no longer an officially recognised statistic, but the dataset has a longer history that CPI so is more useful in that respect).

Source: Office for National Statistics data

“That is the highest reading since 1991 when the UK was in a deep recession and one that was resolved, at least in part, by the devaluation of sterling after its inglorious exit from the Exchange Rate Mechanism in 1992. If the Misery Index starts to drag down Mr Hunt, then sterling could be particularly quick to show further strain.”

Source: Refinitiv data