‘Budget for growth’ belies sluggishness in UK economy

The problematic fact at the heart of UK chancellor Jeremy Hunt’s “Budget for growth” is that the latest data shows Britain’s economy is still extremely sluggish.

The average annual growth rate from the eve of the coronavirus pandemic was forecast by the Office for Budget Responsibility fiscal watchdog at only 1 per cent. That expectation was marginally higher than the 0.95 per cent average set out in the Autumn Statement in November.

Before the 2007-08 global financial crisis, the UK economy had been growing on average by around 2.75 per cent a year.

Economic performance is, however, expected to be better over the coming year because households and companies will benefit from gas and electricity costs that are expected to be half the level that was feared in November.

Instead of a sizeable recession this year followed by a strong recovery, the fiscal watchdog now expects the squeeze on incomes to be smaller, with the economy shrinking only 0.2 per cent rather than 1.4 per cent in 2023.

This period of near-stagnation will then be followed by weaker rebound, leaving the economy just 0.5 per cent larger at the end of the forecast in early 2028 than in November.

These are small changes. As the OBR points out, the UK economy is still hobbled by “structural weaknesses . . . that have been exacerbated by recent shocks”, including stagnant business investment, a drastic fall in participation in the labour market and weak productivity growth.

While the chancellor in his Budget put a positive spin on these growth forecasts, he could have made more of the OBR’s public finance predictions, which were significantly improved.

Having been too pessimistic about government borrowing and debt in November, the OBR revised down its public borrowing expectations for 2022-23 by £24.5bn and carried this through for the next five years of the forecasts.

By 2027-28, the fiscal watchdog said that instead of forecasting borrowing of £69.2bn, it would have forecast a deficit of £40.8bn if Hunt had not given away part of the benefit of lower borrowing.

The latest Budget giveaways totalled about £20bn a year for the next three years, with Hunt introducing access to free childcare for families with children under three years old and 100 per cent allowances for business investment.

The figure fell to £10bn a year in the final two years of the forecast, when the chancellor could not promise to keep the investment allowances in place.

Spending only part of the chancellor’s windfall means that the final borrowing outlook remained significantly better than in November for most years of the forecast.

Lower borrowing left the underlying level of public sector net debt smaller as a share of national income across the forecast. By 2027-28, it is expected to be 94.6 per cent of gross domestic product, compared with 97.3 per cent predicted last November.

The key question in the wake of the chancellor’s announcement is why he decided to end his growth-enhancing corporate tax investment allowances early in 2026-27.

The answer appeared to be that even though the public finances are expected to be stronger in the middle of this decade than previously feared, the precise fiscal rule the chancellor set — to have the public sector debt ratio falling in five years’ time — remained difficult to hit.

This problem arose because the slightly improved outlook for the whole economy over the five years also contained a weaker growth rate in 2027-28 than expected in November, leaving the chancellor unable to meet is fiscal rule if he retained the enhanced investment allowances.

Many will find that odd. Because he set a specific fiscal rule, Hunt has been forced to end early the one measure he said was “huge” for encouraging investment in a “Budget for growth”.

Another rewrite of the fiscal rules in the coming months seems likely.

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