In one of the most difficult to interpret set of public finance forecasts for many years, chancellor Jeremy Hunt appeared both to have lots of cash to splash and be tightly constrained by his fiscal rules.
But he also has a good chance of being able to unveil a big pre-election giveaway by the autumn. It is not surprising that one Tory official said it was “a Budget for wonks” ahead of Hunt’s statement to parliament.
The chancellor claimed he was outlining a “Budget for growth”, having stabilised the public finances through a £55bn a year fiscal consolidation in his Autumn Statement last year that drew a line under the chaos of Liz Truss’s shortlived premiership.
He said that his Budget measures would provide “long-term, sustainable, healthy growth that pays for our NHS and schools, finds jobs for young people, and provides a safety net for older people all whilst making our country one of the most prosperous in the world”.
But the latest forecast by the Office for Budget Responsibility suggests that the British economy will grow only 1 per cent a year on average between the eve of the coronavirus pandemic and the start of 2028.
That is only marginally higher than the 0.95 per cent average set out by the UK fiscal watchdog at Hunt’s Autumn Statement in November.
Even though the growth forecast is sluggish, the OBR’s prediction is both at the top end of estimates by independent economists and far more optimistic than the Bank of England’s calculation.
It is this growth optimism compared with other forecasters that prevented the public finances from being holed below the waterline in the Budget.
But because growth was hardly better than in the OBR forecasts at the Autumn Statement, the chancellor’s ability to find new money for expensive items — notably business investment incentives, pension tax relief and childcare — stemmed largely from the fiscal watchdog’s predictions of higher tax revenues.
These revenue estimates are on average more than £20bn per annum higher than in November’s forecast for the five years starting in 2023-24, giving Hunt what the OBR described as a “fiscal windfall”.
This windfall is even more evident in the OBR’s underlying forecasts, which were much better than in November.
The OBR revised down its public borrowing expectations for 2022-23 by £24.5bn, and carried this through for the next five years of the forecasts. By 2027-28, the fiscal watchdog said the underlying deficit would be only £40.8bn, much lower than the £69.2bn forecast in November.
Instead of accepting this big improvement in borrowing, Hunt chose to reach for the government’s cheque book.
But rather than raise public sector pay to end widespread strikes, Hunt chose to give companies more generous capital allowances, provide the well-off with enhanced tax relief on pension contributions, and offer free childcare to parents with one- and two-year-olds.
The OBR said: “The chancellor has used two-thirds of his [windfall] on his Budget measures.”
Unusually, the money spent was not uniform across the years in the OBR forecasts.
There is a big bulge of £20bn of giveaways in the next three years before the handouts dip to about £10bn in 2026-27 and 2027-28.
This reflects how Hunt’s policy of giving companies the opportunity to write off 100 per cent of their capital spending against taxable profits lasts only for three years.
Hunt was prevented from hailing a permanent “full expensing” of business investment because he was “hemmed in” by the operation of “his own poorly designed fiscal rule”, according to Paul Johnson, director of the Institute for Fiscal Studies, a think-tank.
This rule states that underlying public debt as a share of gross domestic product must be falling by the fifth year of the OBR forecast, and is predicted to drop by only 0.2 percentage points in 2027-28 in the fiscal watchdog’s latest predictions.
As Johnson made clear, the rule was odd because the debt profile of the UK is objectively healthier in this set of forecasts than those in November.
By 2027-28, net public sector debt is expected to be 94.6 per cent of GDP, compared with 97.3 per cent predicted in the Autumn Statement.
But the rule does not consider the level of debt, and only the change in the fifth year of the OBR forecast.
It constrained Hunt because the fifth-year growth forecast by the fiscal watchdog is now weaker in 2027-28 than it expected in November.
This made it more difficult to have debt falling as a share of GDP. Hunt met his rule, according to the OBR, with just £6.5bn leeway — a historically small amount of headroom against the fiscal rule.
The result was that Hunt’s new capital allowances for companies are for now deemed temporary.
If that was bad news for the chancellor, the good news is that this constraint stemming from his debt rule will probably disappear in the autumn.
By then, the fifth year of the OBR forecast will roll forward to 2028-29, and that will make the rule much easier to hit.
Even without any improved economic and public finance forecasts at the next Autumn Statement, the extra year to hit the debt rule will give the chancellor significant scope for future giveaways.
Sandra Horsfield, economist at Investec, said that with the extra time and a fair wind, the outlook would improve for Hunt later this year or in a 2024 Budget. “The chancellor will enter the next phase of his fiscal strategy, which will be to find room for a tax giveaway ahead of a likely 2024 election,” she added.
The scale of the likely giveaway to come cannot yet be estimated, but Treasury insiders are hopeful of a significant package of tax cuts and money to boost the performance of stretched public services.
Borrowing and debt for the rest of this decade still appear challenging, but it looks like Hunt can now see a pathway to being seen as a Conservative chancellor who filled a gaping hole in the public finances and then used a better economic outlook to embark on a tax-cutting mission.