Following Jeremy Hunt’s Spring Budget Statement yesterday and subsequent OBR report, Paul Johnson, Director at the Institute of Fiscal Studies (IFS) has given his reaction commenting:
“Once again Jeremy Hunt can be grateful that the Office for Budget Responsibility is more optimistic than the Bank of England. It handed him some room for manoeuvre. On the other hand his own poorly designed fiscal rule, which requires debt to be falling in the last year of the forecast, hemmed him in. He’s now meeting that target by an even smaller margin than previously – and even that requires the government to claim it will stick to an extremely tight set of post-election spending plans.
Looking for growth Mr Hunt pulled a whole range of policy levers. Overall these look like a sensible set of changes which could have the sort of marginal, but positive, impact which is perhaps as much as we can expect from measures in a single Budget.
The big expansion in the childcare offer to families with younger children, likely doubling spending on childcare, looks like it will take us close to completing a 25 year long journey during which a new arm of the welfare state has been created. It should help tens, but not hundreds, of thousands of parents into work – provided that it is appropriately funded.
In addition, the White Paper published alongside the Budget proposed some quite fundamental changes to the disability benefit system, in part to encourage work. Poorly designed pensions tax allowances were increased or scrapped in an effort to encourage a relatively small number of better-off workers to stay in the workforce a bit longer. These pension tax changes are unlikely to have a big effect on overall employment.
There are many benefits to allowing full expensing of investment against corporation tax, though it is not without drawbacks. But the fact that this change is temporary and was only announced now is most definitely not welcome. Today’s announcement is just the latest in a long line of changes and temporary tweaks. There’s no stability, no certainty, and no sense of a wider plan.
As expected, the energy price cap will remain at its current level for the next 3 months, so that an average bill will stay at £2,500 rather than rising to £3,000. There was some extra money to shore up the defence budget, alongside the extra cash for childcare. And surprise surprise, he found £6 billion to freeze fuel duties and maintain the supposedly temporary 5p-a-litre cut announced last year, despite a fall of around 40p a litre in the price of petrol over the last year. Yet we’re supposed to believe, wink wink nudge nudge, that the 5p cut will be reversed next year. Forgive me if I harbour some doubts.
Just as notable was what Mr Hunt didn’t announce. There was no funding to be found to improve the pay offer to striking public sector workers, where £6 billion might have been enough to make an inflation-matching pay offer possible this coming year. That’s a political choice. Money for motorists, but not for nurses, doctors and teachers. And the big personal tax rises planned for next month, via the freezing of income tax thresholds, will still go ahead. That will mean an extra £500 in tax for basic rate taxpayers in 2023–24, and an extra £1,000 for higher rate taxpayers. These tax rises may be necessary from a fiscal point of view, but they are an important part of the reason why household incomes are still expected to fall more over the current two year period than at any point in living memory.
The bigger fiscal picture hasn’t changed enormously since the autumn. The OBR expects the economy to grow a bit faster in the short-term, and a bit slower in the medium-term, combining to produce an economy 0.6% larger in real-terms in 2027–28 than under the autumn forecast. The government remains on track to meet its relatively loose fiscal targets by only the barest of margins, despite a historically high tax burden and some extremely tight post-election numbers for spending on public services. Debt interest spending is forecast to remain well above what was forecast a year ago. And we are still in the midst of an enormously difficult period for households. We’re by no means out of the woods yet.”