Balance of fiscal prudence and backing the economy
JEREMY Hunt’s challenge in his first budget as Chancellor was two-fold.
First, with the outlook for the public finances having deteriorated substantially since earlier this year – as a result of weaker growth and higher interest rates – he had to indicate how to set out how his plans made a credible move towards fiscal sustainability.
Second, he needed to set out how he would avoid the UK economy slipping into an even deeper recession than the one it is already heading into, and to set out how he would protect households against the high inflation that is putting a serious squeeze on living standards.
How did he respond to his twin-challenge?
In net terms, the policy measures announced for next year – 2023-24 – are largely neutral, with some additional spending compared to previous plans offset by tax rises.
In subsequent years, tax rises and spending cuts are planned in order to meet, over the longer term, the Chancellor’s fiscal rule that debt should be falling as a percentage of GDP within a five-year window.
By 2026-27, measures announced yesterday will reduce the deficit by £60bn, relative to previous plans.
In the immediate term, Mr Hunt’s plans for 2023-24 put the emphasis on economic support rather than consolidation. Benefits will rise in line with inflation, the pension triple-lock will remain, there is some additional departmental spending, and a range of support in respect of energy bills will stay in place – including a price cap of £3000 for a typical household, and additional support for those on means tested benefits. But these measures are not enough to offset the grimmest outlook for living standards on record.
Household incomes are forecast by the OBR to fall by over 7% between 2022-23 and 2024-25. This is a larger real terms fall over a two-year period than has been seen previously – including during the aftermath of the financial crisis.
This remains a parliament of tax rises. The tax burden will increase from 33% of GDP in 2019-20 to 37.5% in 2024-25.
The Chancellor did announce some additional departmental spending relative to plans set out previously, mainly on the NHS and education in England. This spending generates consequentials for the Scottish Government – around £800m in 2023-24 and £600m in 2024-25.
In overall terms this was a statement containing a lot of measures. In net terms these have a fairly neutral effect in 2023-24, with higher taxes on the better off offsetting some additional departmental spending, and without the need to impose lower-than-inflationary uplifts to benefits.
The implied 1% per annum real terms increases to departmental spending allow the government to say it is avoiding austerity, but it is unlikely to feel that way.
The Chancellor will hope his plans strike the right balance between fiscal prudence and supporting the economy. But the difficulties of striking the right balance are stark. Despite his measures to support households in 2023-24, that is not enough to avoid large falls in disposable incomes.
Yet on the other side of the equation, his plans imply that he will only just meet his target to get debt falling as a percentage of GDP within five years, some two years into the next parliamentary term.