Jeremy Hunt claimed on Wednesday that he had proved the “naysayers” wrong in delivering a “budget for growth” – the magic ingredient to fix public services, repair the social safety net and raise living standards.
From tax breaks for business to childcare, welfare reforms and bigger pensions, he took measures aimed at helping the UK grow the economy faster by removing barriers to business investment, tackling labor shortages and putting more emphasis on the UK’s high-tech industries.
The fiscal watchdog, the Office for Budget Responsibility, said that taken together, the measures made more of a difference to the UK’s medium-term prospects than any other changes announced by the chancellor since 2010.
But despite these accolades, their effects will be insignificant. The OBR said a £7bn support package to boost labor supply would boost GDP by 0.2 per cent in 2027-2028 – a small effect that the watchdog admits is too uncertain.
Moreover, as the OBR now takes a more pessimistic view of underlying trends in the UK workforce, it thinks the country’s long-term growth prospects look no better than last November. Its forecast for potential output growth in 2027-28 suggests that the economy may not grow more than 1.75 per cent per annum without accelerating inflation.
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In the short term, the economic outlook has brightened, at least, thanks to a sharp drop in gas prices, interest rate expectations and strong wage growth. The OBR said this would lead to a “shorter and much smaller” recession this year, with GDP falling just 0.6 per cent below its recent peak.
It predicts the economy will return to growth in the second half of 2023 and regain its pre-pandemic size in mid-2024, six months earlier than thought. By 2027-28 it will be a modest 0.6 percent higher than expected in November.
Inflation is also forecast to fall faster than the OBR expected, falling to 2.9 per cent by the end of 2023 and around zero by the middle of the decade.
Richard Hughes, chairman of the watchdog, said this would ease the pressure on households, but their disposable income per person would fall by 6 per cent this financial year and would be the “biggest two-year drop in living standards since records began in the 1950s”.
However, most important to the UK’s long-term prosperity is its ability to overcome two major structural problems: the long-standing weakness of business investment, which has exacerbated an equally long-standing weakness in productivity; and the recent contraction in the workforce.
Hunt’s answer to the first problem is a new £9bn-a-year tax break that will allow companies to deduct all investment in plant and machinery from taxable profits, replacing the current “super-deduction”.
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But while the chancellor wants to make the new measure permanent, initially for just three years, it would encourage businesses to boost investment, not necessarily raise it. The OBR’s forecast for investment over the five-year period is essentially unchanged from November and, while it said the capital stock will not grow faster than the labor force, it expects no improvement in productivity.
“Because it’s a temporary policy, it only has a temporary effect,” Hughes said.
Greg Thwaites, director of research at the Resolution Foundation think-tank, said the temporary measure would be “close to useless”. “You need a permanent tax regime for British companies,” he added.
By contrast, the measures Hunt is taking to get more people into the workforce will have a “material and positive impact” in the OBR’s assessment — although they will take time to make a difference.
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By far the biggest impact will come from the extension of free childcare to parents of children under the age of two. This could bring around 60,000 people into part-time work by 2027-2028, with a similar impact on a further 1.5 million parents who are already working extra hours, according to the OBR.
Broad reforms to the benefits system, affecting disabled people, parents and carers, could bring the total increase in labor supply from all of Hunt’s measures to 110,000, the OBR said – although it added that the number could be as high as 240,000 or 55,000. As little as possible.
However, according to the Institute for Fiscal Studies think-tank, the increase in pension allowances for high earners – billed as a measure to prevent senior doctors from retiring early – is unlikely to have a major impact on employment, as it would mean Some people hit their target retirement income early.
Even these measures would not be enough on their own to counter the worsening trend in UK labor supply, which already looks weaker than in November, with employment falling by 130,000 in 2027-28.
The main reason the OBR has not downgraded the UK’s long-term growth prospects is that it now expects net immigration to be much higher than thought. It predicts that the number of migrants will settle at 245,000 for the year, instead of the 205,000 expected in November.
This could increase the number of employees by 160,000 and add 0.5 percent to potential output in 2027, the watchdog said.
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Economists said Hunt’s measures were a welcome attempt to tackle some long-standing weaknesses, but they pointed to major flaws, including the absence of any more money for public sector salaries.
Torsten Bell, director of the Resolution Foundation think-tank, contrasted the “carrot and stick combination” of getting people to work more, with the lack of an “investment-led productivity drive to help those workers earn more”.
Jigar Kakkad, director of policy at the Tony Blair Institute think-tank, acknowledged that the chancellor faced immediate challenges but added that he had failed to address “deeper, systemic issues” with planning, public services and the green transition.
“Britain needs more than a budget. It needs a plan for the future,” he said.
