Key policy measures were largely as discussed in the media beforehand and included an extension of free childcare and reforms to pension allowances, both of which should be helpful for keeping people in work and getting them back to work.
We also had a measure to soften the end of the ‘super-deduction’ (the tax measure designed to incentivise business investment) and an extension for three months of the £2,500 Energy Price Guarantee.
The most expensive measures for 2023-24 were freezes on fuel duty and the replacement for the investment-incentivising ‘super-deduction’ (in the replacement scheme, companies will be able to write off the cost of certain qualifying investments in the year of investment). By the end of the Office for Budget Responsibility’s (OBR) forecast profile (2027-28) the most costly measure announced in the Budget was the extension of free childcare (this reform is being introduced in stages).
Overall, these policy stimulus measures are front loaded. By the end of the forecast horizon, i.e. 2027-28, there was a net giveaway in terms of policy measures of £10.4bn, but that is much smaller than for the 2023-24 fiscal year (at £21.9bn).
Despite all this extra spending, in most years the forecast for the deficit is smaller (i.e. healthier looking) than in the OBR’s November forecasts. By 2027-28, they are nearly £20bn smaller than in the November forecasts at £49.3bn compared to a previous forecast of £69.2bn (both of which are much smaller than for 2022-23 at £152.4bn).
So what is going on? Broadly, a better starting point and more economic supply: First, the starting point was better than the OBR expected (energy support measures and debt interest cost less than expected for example). Near-term GDP growth forecasts were revised up and the better starting point for tax revenues increased the amount the Chancellor could spend.
Second, from 2024-25 upward revisions to the economic forecasts helped receipts (which the OBR attributes to lower energy prices and upward revisions to net migration).
Third, the net giveaways from the Chancellor are smaller in the later years of the forecast.
Fourth, the OBR have also assumed that the indirect effects of the policies announced today help boost supply in the medium term. That raises tax receipts and helps the public finances.
However, the OBR nevertheless still expects a fall in GDP in 2023 (-0.2%). The recent picture for output in the economy hasn’t been strong, with GDP relatively flat since late 2021. Several of the measures announced seem likely to increase supply in the economy (e.g. potentially increasing labour participation) and are very welcome from that perspective. However, some of these policies will take time to have an impact and the overall effects are hard to gauge. Meanwhile, the UK economy continues to face a number of challenges and global economic uncertainty has risen in recent days in the wake of market events.
Public sector debt/GDP takes a while to fall: In terms of the overall health of the fiscal finances, it is only in 2027-28 that the forecast has the debt/GDP ratio targeted by the Chancellor starting to fall. Debt interest spending is still at well above pre-pandemic levels as a percent of revenue (or GDP) at that point. It does not look like it would take much of a shock to mean the government would no longer be on track to meet their fiscal target with respect to debt. According to the OBR, “The Chancellor faces a tougher challenge than any of his post-financial crisis predecessors in turning around the sustained rise in the debt-to-GDP ratio.”
Big picture – still fiscal tightening ahead: Taking into account all the past Budget decisions, and using changes in the cyclically-adjusted primary deficit as a proxy, the big picture for fiscal policy now looks like a net stimulus for 2023-24 (consistent with upside risk to my 2023 GDP forecast) and then the OBR’s figures imply a significant net fiscal tightening. However, most those years of fiscal tightening would be post-election so the current government may not be in power.
Thinking about any impact on the Bank of England (BoE) and the interest rate outlook, this was a net stimulative Budget – especially in the near term – and at face value could therefore support more monetary policy tightening to offset the potential boost to inflation. However, the extension of the energy bill price cap will help soften near-term inflation relative to where it would have been, and the assessed overall impact on inflation will partly depend on any BoE judgement of how successful these measures would be at helping rebalance the labour market (i.e. will they boost supply more than demand). Although, given the time horizon relevant for BoE monetary policy is only two to three years, this may not weigh heavily in their thinking. Recent market events anyway make the near term outlook for monetary policy less clear and it would not be surprising if the Monetary Policy Committee chose to keep rates on hold at their March meeting (at this stage, if they did so, I’d still expect them to hike in May given the strength of domestically driven inflation).
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