Britain’s economic prospects have improved enough to hand Chancellor of the Exchequer Jeremy Hunt an extra £10 billion ($12 billion) at next month’s budget, removing the threat of a further round of austerity, experts say.
(Bloomberg) — Britain’s economic prospects have improved enough to hand Chancellor of the Exchequer Jeremy Hunt an extra £10 billion ($12 billion) at next month’s budget, removing the threat of a further round of austerity, experts say.
Earlier this year, the Office for Budget Responsibility warned Hunt that it had overestimated medium-term growth and he faced the prospect of more belt-tightening to fill a multi billion-pound fiscal hole.
Since then, economic growth has improved, businesses have stepped up investment, energy prices have fallen and tax receipts have been healthier than expected. That combination of factors is likely to have more than offset the impact of the OBR’s downward revisions.
“Some things have changed,” said Sanjay Raja, chief UK economist at Deutsche Bank. “Net-net we are in a much better position than we previously thought. This should spell some good news for Chancellor Hunt.”
Martin Beck, chief economic adviser to the EY ITEM Club, said recent economic developments “improve the fiscal position, and the margins against the fiscal rules, by around £10 billion.”
Hunt will want to bank most of the extra headroom to rebuild his fiscal buffer in case of another economic shock, limiting the amount available for giveaways. But it will spare him another round of austerity after the £55 billion of tax rises and spending cuts in November’s autumn statement.
What Bloomberg Economics Says …
“Chancellor of the Exchequer Jeremy Hunt might have more room to maneuver in his upcoming budget than he has admitted publicly. We estimate that sliding energy prices and better-than-expected borrowing data has roughly doubled the headroom against his fiscal target of getting debt falling in five years.”
—Dan Hanson, Bloomberg Economics. Click for the INSIGHT.
There are huge calls for public money at the moment. Public-sector workers are striking for better pay, with every 1% increase costing roughly £2.5 billion. The National Health Service and social care need more funds for staff and training.
Businesses are demanding a replacement for the super-deduction investment relief when it expires in April and the main tax rate on corporate profits rises from 19% to 25%.
Conservative lawmakers, facing the prospect of losing power in a general election expected next year, want income-tax cuts and childcare support. Freezing fuel duty, as the government has done for the past decade, will cost £6 billion.
The Treasury declined to comment but Hunt signalled earlier this week that there was no room for significant giveaways. “It is vital we stick to our plan to reduce debt over the medium-term,” he said.
Hunt has two fiscal rules, for government debt to be falling as a share of GDP in the fiscal year starting April 2027 and for borrowing to be below 3% of GDP in the same year. In November, the debt rule was judged to be met with just £9.2 billion of room to spare, a historically narrow margin. Borrowing headroom was £18.6 billion. The debt rule is expected to be the binding one again.
Hunt will have room for temporary short-term giveaways that do not bind in 2027-28 as borrowing this year is on track to be £30 billion below forecast, due to better-than-expected tax receipts and less expensive energy support. The Times reported that lower energy bills and other improvements will reduce government spending by £24 billion in the 2022-23 fiscal year.
He could use the money to scrap plans to increase the energy price cap for a typical household from £2,500 a year to £3,000 a year in April — at a cost of around £5 billion. Alternatively, he could meet a Ministry of Defence request for an extra £10 billion over the next two years for the war in Ukraine.
The longer-term fiscal improvement is partly driven by the way the OBR assumes energy costs affect productivity growth. For every 10% fall in energy prices, the level of potential output rises by 0.2% over five years.
“Wholesale gas prices for delivery this year and next are now around half of what the OBR was assuming in November,” Beck said. “The big fall in energy price futures could encourage the OBR to take a more optimistic view of long-run growth.”
The budget watchdog recently admitted its growth forecasts have on average been 0.5 percentage points too optimistic, which accounts for its earlier downgrade. However, lower energy prices will offset that.
Tax receipts have also proved resilient over the first 10 months of the year, with valued-added tax, income tax and capital-gains tax all generating more revenue than expected. Raja said it would be reasonable to expect the OBR to judge that reflects a more tax-rich economy.
The outlook for growth this year is also better than the 1.4% contraction the OBR projected in November. The Bank of England earlier this month forecast a 0.5% fall. Since then, the data has proved stronger than the BOE thought.
Market interest rates have also dropped since November, saving roughly £10 billion a year in the longer-term.
(Updates with BI forecasts and reference to Times estimate in 12th paragraph.)
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