Chancellor of the Exchequer Jeremy Hunt put economic growth at the heart of his first full UK budget, with a general election less than two years away and support for the Conservative Party lagging among voters.
(Bloomberg) — Chancellor of the Exchequer Jeremy Hunt put economic growth at the heart of his first full UK budget, with a general election less than two years away and support for the Conservative Party lagging among voters.
But to do so he stretched his fiscal rules to the limit, and on a day of market turmoil triggered by two US bank failures and the crisis around Credit Suisse Group AG, left only the smallest of cushions to respond to potential shocks.
The “wiggle room is wafer thin,” said Andrew Goodwin, chief UK economist at Oxford Economics, which risks “renewed austerity in future fiscal events.”
Hunt, who was appointed by Liz Truss last year in a bid to save her short-lived premiership and kept the job under her successor Rishi Sunak, had faced intense pressure from Tory Members of Parliament to show he can boost a moribund economy and lift the party in the polls.
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On Wednesday, he unveiled measures including £9 billion ($10.9 billion) of annual tax relief for three years for companies making investments, and labor market reforms worth £7 billion a year to help companies with childcare costs and to deter wealthy older workers from retiring early.
He also announced £3,300 per household for cost-of-living support, including limiting electricity and natural gas bills, and a freeze on vehicle fuel duty.
Better Numbers
According to the Office for Budget Responsibility, the measures will help. In its revised forecast announced by Hunt, the UK is set to avoid a technical recession this year even as the economy shrinks 0.2%. The OBR expects the economy will return to 1.8% growth next year — when Britons go to the polls — and hit 2.5% in 2025.
The “British economy is proving the doubters wrong,” Hunt told the House of Commons. “In November we delivered stability. Today it’s growth.”
Given the warnings from Hunt and Sunak that their first priority was to stabilize the public finances after the turmoil of the 49-day Truss era, it was a more expansive budget than some Tories had feared.
Yet the numbers also stoked concerns about the potential risks.
Compared with Hunt’s last fiscal statement in November, higher tax receipts, lower energy and debt servicing costs, and better growth reduced borrowing by £24.6 billion a year on average. He spent two thirds of that, and only just met his binding fiscal rule that debt must be falling as a share of GDP in 2027-28. The constraint is regarded as proof that the government is committed to sound money, and helped restore calm to financial markets late last year.
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His remaining £6.5 billion of headroom is the smallest margin in the 13 years since the OBR has existed, during which the average has been £25.6 billion.
“This is a very small amount relative to the impact of the shocks we have faced,” the OBR said, adding that past crises have typically added debt worth the equivalent of 10% of GDP.
Election Mode
Political calculations are likely to have been central to that decision.
According to one official familiar with the matter, Sunak was underwhelmed by the lack of ambition in earlier versions of the budget. What Hunt produced stretched the public finances to the limit. The Treasury declined to comment, and Sunak’s office didn’t immediately respond to a request for comment.
“Hunt had a choice,” said Dan Hanson, UK economist at Bloomberg Economics. “Save some of the limited space he has against his fiscal targets for a pre-election giveaway, or spend the money now in the hope that it’s economic outcomes rather than headlines that pick up votes at the ballot box. He chose the latter option. Time will tell whether the gamble pays off.”
There are clear ways in which the budget fits the political timing.
According to the OBR, Hunt’s corporate tax relief will lift growth 0.3% in the fiscal year starting April 2024 as companies invest. Limiting it to three years allowed him to get round his fiscal constraint, as the cost vanished before the rules bit. But with an election approaching, he could never provide the long-term certainty businesses want, though he did hint at a potential manifesto promise, “to make it permanent as soon as we can responsibly do so.”
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By the time it expires, labor market reforms will have kicked in, boosting output by 0.2%. Together with higher migration, the two measures will leave the cash size of the economy 0.8% larger than expected at the end of the forecast period.
Risks
The OBR’s most significant impact was not its growth upgrade or canceling its recession forecast, but rather its assumptions that the economy is more tax rich than thought — and that net migration will be higher.
An additional 160,000 migrants boosts potential output by 0.5% in 2027, providing a bigger supply side boost than either the corporate tax relief or the back-to-work reforms.
Yet immigration is a sensitive issue for the government and the ruling Conservatives, and there are other potential headaches for Hunt. The OBR’s forecast fiscal headroom assumes Hunt brings in more revenue by increasing fuel duty. That is likely to be a non-starter with his party, but if Hunt keeps canceling the fuel duty rise as he did on Wednesday and as every chancellor has done since 2011, his fiscal headroom would shrink to less than £3 billion.
Cost of Living
Hunt effectively used every penny he could find to generate growth, but if the budget was meant to set the Tories up for an election campaign, it’s far from clear he found enough to shift the momentum.
The immediate economic backdrop may look better, with unemployment rising only a little and inflation falling from 10.1% to 2.9% by the end of this year, according to OBR calculations, but the outlook for households remains bleak.
Real living standards per person will fall by 5.7% between April 2022 and April 2024, a less steep decline than forecast in November but “still the largest two-year fall since records began in 1956-57,” the OBR said. In 2028, living standards will still be 0.4% below pre-pandemic levels.
As Hunt delivered his speech, about half a million public service workers, including teachers and doctors, were on strike. It was an indication of how difficult a sell the budget could be, yet he barely mentioned the months-long industrial action, and announced no new measure to try to end it.
The Trades Union Congress called that the “elephant in the room.”
“Allowing public services to wither away will come back to haunt the government,” said Christina McAnea, general secretary of the Unison trade union. “Economies can’t thrive with weak public services.”
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