Hunt at risk of busting his own rules by a country mile, says OBR chief
THE Chancellor would break his fiscal rules “by a country mile” if he took into account likely increased spending on defence and a continued fuel duty freeze, according to the fiscal watchdog chief.
Richard Hughes, chairman of the Office for Budget Responsibility (OBR), said the UK Government’s fiscal framework was becoming “increasingly gamed” as ministers announce “aspirations” for spending without setting out detailed timeframes for delivering on them.
The lack of specifics means they cannot be included in independent economic forecasts handed to the Treasury but “hang over” them and “act as a risk to the achievement of government objectives”, he said.
The OBR forecast, published alongside Wednesday’s Budget, found Chancellor Jeremy Hunt had given himself only a £6.5bn buffer in order to meet his fiscal rule of having debt falling as a proportion of the size of the economy in five years’ time.
Mr Hunt had used the autumn statement in November to relax the UK Government’s existing fiscal rules, pushing back the debt target by 24 months to 2027-28.
Mr Hughes said that “even with two years of extra time” and slightly better growth and employment prospects, the Chancellor was “still struggling to meet that fiscal rule”.
About £4bn of the £6.5bn headroom is linked to increasing fuel duty – something no chancellor has done since 2011.
Mr Hughes indicated that the political likelihood of fuel duty remaining frozen in the next Budget, which is likely to come only months before a general election, and Prime Minister Rishi Sunak’s ambition to spend 2.5% of GDP on defence, could blow a hole in the Chancellor’s debt target.
“There is a list of things that aren’t in our forecast which could easily wipe that headroom out tomorrow,” he said at a post-Budget briefing organised by the Resolution Foundation think tank yesterday. If you combine fuel duty, his aspirations on where he wants the tax regime on businesses to go, and also the aspirations announced earlier on this week about defence spending – and getting it to 2.5% of GDP – when you combine those things, that busts his rules by a country mile.”
He said there were “more and more illusions” being built into the fiscal outlook due to the lack of defined spending plans being announced.
“Governments are finding new ways of gaming these rules,” he continued. “The new game is to announce an aspiration but then say, ‘I’ll only get there when my resources allow.’
“Well, your resources don’t allow so why are you announcing these things?”
He was joined in his assessment by Paul Johnson, director of the Institute for Fiscal Studies (IFS), who accused the Treasury of an “inevitable fiscal sleight of hand” when it came to including the fuel duty escalator in its workings.
“The pretence that fuel duties will always rise next year, when they never rise this year, is becoming increasingly wearisome,” the think tank boss told a briefing yesterday.
“It makes a bit of a nonsense of the fiscal forecasts.”
Downing Street said the Prime Minister remained “committed” to meeting the debt-cutting target and indicated the fuel duty escalator could continue to be accounted for in the headroom figures.
Mr Sunak’s official spokesman said: “The government’s position has not changed and we will make a decision on what is in the best interest of the UK in the future, but I can’t comment on what decisions we may take.”
Meanwhile, Mr Hughes confirmed Mr Hunt engaged with the forecast setting process more than his predecessors, meeting with the OBR four times ahead of Wednesday’s announcements compared with the one or two occasions that had been the norm for previous Treasury chiefs.
Mr Hughes said more engagement with the Chancellor was “very welcome” as separating the forecast and the policy creation process meant there was a risk of a “disconnect between the two”.
It comes after the former chancellor, Kwasi Kwarteng, and former prime minister Liz Truss came under fire after failing to work with the OBR on an assessment ahead of their mini-budget announcement that caused an economic fallout last autumn.
Mr Hughes rejected criticisms of some right-wing politicians about the influence of the OBR’s forecasts, saying: “The idea that we are some arbitrator of the government’s policy
choices or have a veto on them is just nonsense.”
The Chancellor has been warned his multi-billion-pound pensions giveaway may not increase the number of people in work at all and could open an inheritance tax loophole.
Economists also said yesterday that households will feel “continuing pain” over the next year as earnings fail to catch up with high prices during a “lost decade” of living standards.
Mr Hunt used his Budget to abolish the tax-free cap on the lifetime pensions allowance, as he seeks to boost economic growth by decreasing the number of working-age adults opting to retire.
But Labour said it will reverse the “pensions bung for the 1%” if it wins power, as the IFS said it could cost up to £100,000 per worker kept on.
Mr Johnson said removing the cap on the allowance standing at £1.07m “won’t play a big part, if any, in increasing the number of people in work”.
The OBR has estimated the policy could increase the workforce by 15,000 people.
However, Mr Johnson described the assumption as “optimistic” and said it was disappointing that “overgenerous aspects” of pension taxation were not being reined in, “not least complete freedom from inheritance tax”.
Mr Johnson was unable to say whether the policy would favour wealthy bankers over medics, but added: “I do think that if the fundamental problem it was trying to address was doctors, then it was a rather large sledgehammer to crack a very small nut, and a billion-pound sledgehammer at that.”
Isaac Delestre, an IFS taxation researcher, added some may “even end up retiring earlier” thanks to the policy because they will need to put away less to reach their savings goal.
He said those who will benefit are those with the ability to “build up very large pension pots” or who can contribute more than £40,000 a year to their pensions.
“Pension pots are entirely exempt from inheritance tax so those are additional subsidies that are going to be handed out to people making very large savings under these reforms,” he added.
Economists at the Resolution Foundation also warned the “unneeded tax break for wealthy pension savers” could see some workers choosing to retire early or using their now uncapped pensions savings to avoid inheritance tax.
In the IFS’s assessment, Mr Johnson said projections suggest disposable incomes will be barely higher in 2027 than in 2017 in what he described as a “lost decade for living standards”.
“Finally, what households are going to feel over the next year will be continuing pain. Inflation may be coming down, but prices remain much higher than two years ago. Earnings haven’t caught up,” he said.
Labour vowed to “reverse” the abolition of the tax-free cap on the lifetime pensions allowance if it wins the next general election, and replace it with a scheme targeted at doctors rather than a “free-for-all for the wealthy few”.
Mr Hunt was defending the move, forecast to cost £2.75bn over the next five years, as needed to boost economic growth by easing labour shortages.
He told Times Radio it was “rather bizarre” to say his Budget had been aimed at the wealthiest 1%, as he cited his energy price guarantee extension and fuel duty freeze.
The cost-of-living support package “dwarfs any of the other single measures that we’ve done”, he said on BBC Radio 4’s Today programme.
He defended not limiting the move to doctors, telling BBC Breakfast: “The other options, if we had a scheme that was just for doctors, it would actually be more aggressive because what we’ve announced doesn’t help the very wealthiest doctors.
“The NHS at the moment spends about £3bn a year paying for locum doctors and agency nurses because of these staffing shortfalls. This will help to reduce that, it will free up more resources.”
Harriett Baldwin, Conservative chairwoman of the Commons Treasury Committee, told a Resolution Foundation event she was “very surprised” that the abolition of the cap on the lifetime pensions allowance had not been limited to NHS schemes, as she had expected.