What Does The Independent Budget Watchdog Say About Jeremy Hunt's Plans?
Jeremy Hunt delivered his Spring Budget on Wednesday (Alamy)
Chancellor Jeremy Hunt referred to the assessment of the Office for Budget Responsibility at the start of his Spring Budget statement to the House of Commons on Wednesday, including their forecast that "the UK will not now enter a technical recession this year".
The Office for Budget Responsibility (OBR) is the independent body that provides analysis of the UK's public finances.
The watchdog produces forecasts for Budget statements in the autumn and spring, taking into account any new tax and spend measures. The Treasury does not provide its own forecasts since the OBR was set up in 2010, so these independent analyses indicate whether government plans are sound.
Controversially they were not asked to do so for Liz Truss' mini-Budget that spooked the markets last year, and we all know how that ended...
Here is what the OBR had to say today about the economy’s outlook alongside today's Budget:
Economic downturn will be shorter and shallower than predicted
With a more optimistic view of the economy than last autumn, the OBR has now predicted that the economic downturn will be "shorter and shallower" than they had previously predicted.
However, they have warned that there are still "significant" challenges, with high energy prices, and the slowdown in growth meaning there is a lack of momentum within the economy.
Opening the executive summary of March 2023's economic and fiscal outlook, the watchdog said: "The economic and fiscal outlook has brightened somewhat since our previous forecast in November.
"The near-term economic downturn is set to be shorter and shallower; medium-term output to be higher; and the budget deficit and public debt to be lower."
They also said that recent forecasts have taken account of the uncertainty of Brexit, the pandemic and the Russian war in Ukraine, all of which impacted the economy, and continue to take into account new factors that could have an effect. They pointed to some "risks" that are now likely to have a lower economic impact since November, such as the Bulb energy firm bailout coming at a lower taxpayer cost than anticipated, and the Windsor Framework deal having improved trade relationships.
"In recent forecasts, the course of the pandemic, the path of Brexit, and the impact of the Russian invasion of Ukraine have been highly uncertain, necessitating a range of assumptions and the presentation of alternative scenarios around our central forecasts," the OBR said.
Inflation expected to drop below 3 per cent, in more “rapid” decline than first predicted, but rates remain historically high
Inflation is expected to fall to 2.9 per cent by the end of this year, the OBR has predicted, marking “a more rapid decline than we expected in November”.
The drop in wholesale gas prices and energy bills is helping to reduce inflation, and they have predicted that household bills are expected to fall to £2,200 annually by the end of this year.
Inflation reached a 40 year high last autumn to over 11 per cent, although it has now dropped to slightly over 10 per cent.
House prices to fall by 10 per cent following ‘low consumer confidence’ in market and squeezed incomes
House prices are expected to fall by around a tenth, compared to the high that they reached in the last part of 2022, the OBR has said, and have already started to tumble.
According to the fiscal outlook, prices have already fallen between 3 and 6 per cent between mid 2022 and February 2023.
The number of people buying and selling homes is also expected to drop by 20 per cent relative to where they were in the fourth quarter of 2022.
“Low consumer confidence, the squeeze on real incomes, and the expectation of mortgage rate rises to come are expected to contribute to continued falls in house prices and a reduction in housing market activity,” the OBR said.
However, they predict that both house prices and the number of house transactions will be recovering again by 2025/26.
Net migration predictions up, and bigger population could increase economic output
The OBR has said it expects net migration to "settle" at 245,000 a year — a significant rise on its November prediction of 205,000.
The increase is driven by several factors, including the resumption of international travel after the pandemic, the creation of humanitarian routes for people escaping Ukraine and Hong Kong, and also the issuing of visas by the Home Office.
“A larger population, due to increased net migration, adds 0.5 per cent to potential output in 2027,” the body added.
The government has previously pledged to reduce net migration to tens of thousands, a promise Rishi Sunak had not taken up.
Tax burden predicted to reach post-Second World War high, but still below other comparable economies
The OBR predicts that the tax burden will reach a post-war high of 37.7 per cent of GDP by the financial year 2027/28.
This would be almost 5 percentage points higher than it was before the pandemic.
However, the independent body has said that although the burden is high by historical standards, it has remained below the average tax burden of other advanced economies.
“In 2021, the most recent year for which there are internationally comparable outturn data, the UK’s tax-to-GDP ratio was 33.5 per cent of GDP on the OECD’s measure [..] That is 2.2 per cent of GDP below the average of other advanced economies,” it said in today’s forecast.
Disposable income to continue to fall at quickest rate since 1950s
Household disposable incomes are set to see their biggest two year fall since records began in 1956/57, with a fall of 5.7 per cent over the 2022/23 and 2023/24 financial years.
According to the OBR, this fall in disposable spending power is as a result of rising energy prices and other price rises, which has seen the UK’s inflation sitting above the rate of wage growth.
This means that in 2027/28, real living standards will be 0.4 per cent below where they were before the Covid pandemic.
Responding to the Spring Budget, Labour leader Keir Starmer noted that the fall in income meant that the average UK family was now a tenth poorer than counterparts in France, and a fifth poorer than a comparable family in Germany.
However, these figures have improved as a result of the more positive economic outlook, with the 2027/28 figure now 0.6 per cent higher than was predicted in November.
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