At the heart of UK Chancellor Jeremy Hunt’s “budget for growth” is the troubling fact that the latest data shows Britain’s economy is still extremely sluggish.
The Office for Budget Responsibility fiscal watchdog had forecast an average annual growth rate of just 1 percent since the eve of the coronavirus pandemic. That expectation was slightly higher than the 0.95 percent average set in the autumn statement in November.
Before the global financial crisis of 2007-08, the UK economy was growing at an average of 2.75 per cent a year.
However, economic performance is expected to be better next year as households and companies benefit from gas and electricity costs that are expected to be half the level expected in November.
After a strong recovery rather than a significant slowdown this year, the fiscal watchdog now expects the squeeze on incomes to be less, with the economy shrinking by just 0.2 percent in 2023 instead of 1.4 percent.
This period of near stagnation will then be followed by a weak rebound, with the economy only 0.5 percent larger at the end of the forecast in early 2028 than in November.
These are minor changes. As the OBR points out, the UK economy still suffers from “structural weaknesses . . . which have been exacerbated by recent shocks”, including stagnant business investment, a sharp decline in labor market participation and weak productivity growth.
While the Chancellor put a positive spin on these growth forecasts in his Budget, he could have raised the OBR’s public finance forecasts, which were significantly improved.
Having been very pessimistic about government borrowing and debt in November, the OBR revised up its public borrowing expectations for 2022-23 by £24.5bn and pushed this forward for the next five years of the forecast.
By 2027-28, the fiscal watchdog said that instead of forecasting borrowing of £69.2bn, it would have forecast a deficit of £40.8bn had Hunt not given part of the benefit of lower borrowing.
Hunt’s latest budget giveaways are around £20bn a year for the next three years, with access to free childcare for families with children under three and a 100 per cent allowance for business investment.
The figure fell to £10bn a year in the final two years of the forecast, when the chancellor could not promise to keep investment allowances in place.
Spending only a fraction of the chancellor’s windfall meant the final borrowing estimate was significantly better than in November forecast for most years.
Lower borrowing has reduced the underlying level of public sector net debt as a share of national income throughout the forecast. By 2027-28, it is expected to account for 94.6 percent of gross domestic product, up from 97.3 percent forecast last November.
A key question following the Chancellor’s announcement is why he decided to end his growth-enhancing corporate tax investment allowances at the start of 2026-27.
The answer appeared to be that even though public finances are expected to be stronger than previously feared in the middle of this decade, the specific fiscal rule the Chancellor set – to reduce the public sector debt ratio over five years – remains elusive. to kill
The problem arose because even a slightly improved outlook for the economy as a whole over five years had weaker growth in 2027-28 than expected in November, unable to meet fiscal policy if the Chancellor retained enhanced investment allowances.
Many will find it strange. Because it imposed a strict fiscal rule, Hunt has been forced to end early a measure he said was “huge” to encourage investment in a “budget for growth”.
Another rewrite of fiscal rules is likely in the coming months.
