This article was published in The Times, RedBox and is reproduced with permission.
True to his word the Chancellor’s first Spring Statement was not full of fiscal pyrotechnics. There were no significant announcements of new changes to taxes or spending. If they are to happen they will happen in the Autumn Budget. There was some good news: growth – and the public finances – should both be slightly stronger this year than was previously thought. But the longer-term revisions to the forecasts were more modest and they remain much more downbeat than they were two years ago.
The Office for Budget Responsibility revised up its forecasts for growth this year from 1.5% to 1.7% and for next year from 1.4% to 1.5%. But it has not revised up its assessment of the level of output that the UK economy can sustain over the longer-term. As a result higher growth earlier simply implies lower growth later, leaving the forecast for the economy five years out broadly in the same place it was in November. The bigger picture here is that growth – and therefore the outlook for household incomes – is forecast to continue to be unspectacular to say the least. Over the next five years output per person is forecast to grow at below half the rate enjoyed in the UK over the 50 years prior to the financial crisis.
A similar pattern can be seen with the forecasts for the Government’s deficit. This has been revised down by almost £5 billion this year, with a smaller reduction to forecast borrowing in each of the following five years. In 2022–23 the forecast deficit was revised down from £25 billion to £21 billion. At 0.9% of national income this would be low relative to typical UK deficits in the past. But just two years ago the Government was committed to delivering a budget surplus in 2019–20 and maintaining it thereafter, with the forecasts at the time suggesting this would be achieved by a margin of over £10 billion. So the deterioration in the fiscal outlook since just two years ago is still substantial.
Eliminating the deficit entirely by the mid-2020s – as the Government now claims will happen – remains extremely challenging. It would require new tax rises – or yet further spending cuts – on top of those already planned. The history of fiscal promises in the UK suggests that the Government will in fact fail to meet its target. Most likely we will end up continuing to run modest deficits just as we have typically done in the past.
Considerable pressures on the public finances remain. Government debt is twice the share of national income that it was prior to the financial crisis, increasing the exposure of the government’s finances to changes in interest rates. Population ageing continues to put pressure on public spending – in particular health and social care. Growing numbers who are self-employed or who are employed by their own companies means less direct tax revenue. The shift away from petrol and diesel vehicles means less revenue from fuel duties and vehicle excise duties.
Phillip Hammond did announce some new consultations such as one on taxing the digital economy. These are welcome. But the fiscal challenges ahead are significant and further consultation – and action – will need to follow.