Menu
Sun, 21 April 2024

Newsletter sign-up

Subscribe now
The House Live All
How do we fix the UK’s poor mental health and wellbeing challenge? Partner content
Health
Communities
Mobile UK warns that the government’s ambitions for widespread adoption of 5G could be at risk Partner content
Economy
Environment
Economy
Press releases

Spring Budget Was A "High Risk" Way To Cut Taxes, According To Economists

The Office for Budget Responsibility said Jeremy Hunt left a "historically modest" £8.9bn of fiscal "headroom" in the Budget. (©UK Parliament/Maria Unger)

6 min read

Chancellor Jeremy Hunt's decision to leave a narrow fiscal "buffer room" in Wednesday's budget has been described as a "high risk" strategy by economists who say that deep public spending cuts could be penciled in on the horizon to pay for it.

After announcing the Spring Budget to the House of Commons on Wednesday – which included multiple changes to taxation including a two per cent cut to National Insurance contributions, an abolition of the "non-dom" tax regime, and the introduction of a vape tax – the chancellor said the government was sticking to its plan for "long term growth. 

"[This Budget] delivers more investment, more jobs, better public services and lower taxes," Hunt told MPs. 

"But dynamism in an economy doesn’t come from ministers in Whitehall, it comes from the grit and determination of people who take risks, work hard and innovate. Not government policies, but people power.

"It is to unleash that people power that we have today put this country back on the path to lower taxes."

But economists have said Hunt's Budget is unusually "high risk" in that it leaves significantly less "fiscal headroom" than usual despite a difficult economic political backdrop – with the Office for Budget Responsibility (OBR) in its forecast on Wednesday describing the £8.9bn margin left by the chancellor as "historically modest". 

The term "fiscal headroom" refers to what the government can tax and spend within the fiscal rules it has put upon itself – with the current government's rules centred on having debt falling as a percentage of GDP within five years. 

"In November, he had £13bn and now, I believe it's below £9bn – so less than a third of the average headroom of previous fiscal events," George Dibb, associate director for economic policy at IPPR told PoliticsHome. 

"And that is obviously the space you have to eat into, if you do have any risks – or anything that pops up that isn't in the forecast." 

In its economic forecast accompanying the Budget, the OBR said while it expects inflation to fall back to 2 per cent by the end of the year, the overall outlook is a "highly uncertain" due to international geo-political factors such as the conflict in the Middle East. 

Modelling in the OBR's report suggests, for example, if the conflict in the Middle East interupts supply chains and significantly reduces energy supplies, causing inflation to spike back over 7 per cent, government borrowing could increase by by £23.1bn on average over the five year forecast. 

James Smith, research director at the Resolution Foundation, also told PoliticsHome the chancellor's decision to leave such a narrow amount of "buffer room" was "extremely striking" in the current economic climate. 

"He's basically leaving the second smallest buffer room for manoeuvre that we have had since the start of the OBR," said Smith.

"It's extremely striking how little room he's leaving, and you might say this is hardly the time to do that because we've got a very uncertain inflation outlook.

"We've got geopolitical risks, we're in a recession – how quickly will we recover? Uncertainty is high, but the chancellor is leaving a very small gap."

Smith said the decision to leave such small "fiscal headroom" was even riskier because it was dependent on measures such as ending the freeze on fuel duty, which has been frozen for over a decade. 

"[Extending the freeze] would add something like £5 billion... he's only got that wafer thin headroom, that would be almost all wiped out just by fuel duty," he said. 

"And then there's also big cuts to day to day spending, which look totally undeliverable."

In the OBR's forecast document, economists highlight a lack of detailed departmental spending plans beyond 2024-25, with the OBR saying this implies "no real growth in departmental spending per person over the next five years".

Jeremy HuntThe watchdog say this, coupled with the government's commitments to spending elsewhere on policies like the NHS workforce plan, implies "a real cut" in all other departmental budgets of 2.3 per cent a year from 2025-26.

"We've only got fiscal plans up to 2024/25 then, beyond that, pencilled in a number," Smith continued.

"If you figure out what the government has said in terms of protecting health spending, education, overseas aid, military spending, and try to figure out what's happening to the rest of the departments, what you find is basically cuts that are nearly £20bn in terms of further hits to those departments, having already had those departments really hit hard by austerity.

"You're seeing crumbling signs of fraying public services, like long NHS waiting lists, big asylum backlogs, all the rest of it. It's cuts that are three quarters of the intensity of what we saw during the sort of peak austerity is George Osborne."

He added: "Any cuts are paying for a large chunk of the tax cuts that we've had. What we've got is a government trying to draw a tax cutting, small government dividing line with the opposition, and as a result, pencilling in these very harsh cuts to public services in order to deliver tax cuts. That gives you that wafer thin headroom."

Ben Zaranko, senior research economist at Institute for Fiscal Studies, told PoliticsHome there were risks facing the government in terms of how realistic their spending commitments are.

"One risk can be summarised as they won't manage to implement all of the tax rises that are pencilled in, because they'll come unstuck," he said.

"We've not managed to freeze income tax threshold for this long before. The pressure to undo that will become immense, that's the first risk.

"The second risk is that they will end up spending more than they currently say they will. Two related reasons for that is because their plans look quite tight, they probably imply making some fairly deep cuts to some areas of government that are currently struggling: councils, prisons, further education, colleges, things like that. 

"It might just be very difficult to make cuts to those areas without them completely keeling over."

Zaranko, like the OBR, also said the impact of international geopolitical risks "in a more uncertain world" could affect inflation, interest rates, and government debt were difficult to predict.

"Interest rates are moving around all over the place, inflation has been much more volatile than it has been for a long time, even things like migration numbers are going all over the place," he added.

"[That's] why the chancellor seeking to meet his debt target by the finest possible margin is a spurious degree of precision.

"We shouldn't be aiming to fine-tune – meeting things to the penny – in five years time when this stuff is moving around all over the place. We should recognise that the world is more uncertain and riskier, and he's not been doing that.

"He's a chancellor in difficult times, the economy keeps getting buffeted by shocks, but prioritising tax cuts, rather than building a buffer to allow for that greater uncertainty, comes with risks.

"It's very risky we're only just, by a tiny margin, on track to stablise the debt to GDP ratio in five years. It's not the be all end all, but it's the current government's fiscal rule, and there's good reasons not to want it heading skywards indefinitely."

PoliticsHome Newsletters

PoliticsHome provides the most comprehensive coverage of UK politics anywhere on the web, offering high quality original reporting and analysis: Subscribe

Read the most recent article written by Nadine Batchelor-Hunt - Committee Chair Tells DWP To "Get A Grip" On Carer's Allowance Overpayments

Categories

Economy
Podcast
Engineering a Better World

The Engineering a Better World podcast series from The House magazine and the IET is back for series two! New host Jonn Elledge discusses with parliamentarians and industry experts how technology and engineering can provide policy solutions to our changing world.

NEW SERIES - Listen now