Jeremy Hunt on Wednesday claimed he had proved the “declinists” wrong in delivering “a budget for growth” — the magic ingredient to fix public services, repair the social safety net and boost living standards.
From tax breaks for business to free childcare, welfare reforms and a big pensions giveaway, he reeled out measures intended to help the economy grow faster by removing obstacles to business investment, tackling labour shortages and giving the UK more heft in high-tech industries.
The Office for Budget Responsibility, the fiscal watchdog, said that taken together, these measures had made more difference to the UK’s medium-term prospects than any other set of changes announced by a chancellor since 2010.
But despite this accolade, their effects will be marginal. The OBR said a £7bn package of support to boost labour supply would raise GDP by 0.2 per cent in 2027-2028 — a small impact that the watchdog admits is very uncertain.
Moreover, because the OBR now takes a more pessimistic view of the underlying trends in the UK workforce, it thinks the country’s long-term growth prospects look no better than they did last November. Its forecast for potential output growth in 2027-28 implies the economy cannot expand by more than 1.75 per cent a year in the medium term without fuelling inflation.
In the short term, at least, the economic outlook has brightened, thanks to the steep fall in gas prices, lower interest rate expectations and stronger wage growth. The OBR said this would lead to a “shorter and much shallower” downturn this year, with GDP falling just 0.6 per cent below its recent peak.
It predicted the economy would return to growth in the second half of 2023 and regain its pre-pandemic size in the middle of 2024, six months earlier than thought. By 2027-28, it would be a modest 0.6 per cent larger than expected in November.
Inflation is also forecast to come down faster than the OBR expected, falling to 2.9 per cent by the end of 2023 and hovering around zero by the middle of the decade.
Richard Hughes, chair of the watchdog, said this would reduce the squeeze on households, but a 6 per cent fall in their disposable income per person over this financial year and next would still be “the largest two-year fall in living standards since records began in the 1950s”.
What matters most to the UK’s longer-term prosperity, though, is its ability to overcome two big structural problems: the longstanding weakness of business investment, which has exacerbated an equally longstanding weakness in productivity; and a more recent shrinkage in the workforce.
Hunt’s answer to the first problem is a new £9bn-a-year tax break that will allow companies to deduct all investment in plant and machinery from taxable profits, replacing the current “super-deduction”.
But while the chancellor wants to make the new measure permanent, it is initially in place for only three years, creating an incentive for businesses to accelerate investment, not necessarily to increase it. The OBR’s forecast for investment over the five-year period is essentially unchanged since November and it said that because capital stock would not grow any faster than the labour force, it did not expect any improvement in productivity.
“Because it’s a temporary policy it only has a temporary impact,” Hughes said.
Greg Thwaites, research director at the Resolution Foundation think-tank, said a temporary measure would be “close to useless”. “You need British companies to have a settled tax regime,” he added.
By contrast, the steps Hunt is taking to bring more people into the workforce will have a “material and positive impact”, in the OBR’s assessment — although it will take time for them to make a difference.
The biggest effect by far will come from the expansion of free childcare to the parents of children under two. This could bring about 60,000 people into part-time work by 2027-2028, with an equivalent effect coming from a further 1.5mn parents who are already working taking on additional hours, according to the OBR.
Wide-ranging reforms to the benefits system, affecting disabled people, parents and carers, could bring the total increase in labour supply from all Hunt’s measures to 110,000, the OBR said — although it added that the numbers could plausibly be as high as 240,000 or as low as 55,000.
However, the increase in pension allowances for high earners — billed as a measure to prevent senior doctors retiring early — is unlikely to have a big effect on employment, according to the Institute for Fiscal Studies think-tank, because it will mean some people will hit their target retirement income sooner.
Even these measures would not have been enough on their own to counteract the worsening trend in UK labour supply, which already looks weaker than it did in November, pulling down employment in 2027-28 by 130,000.
The main reason the OBR has not downgraded the UK’s long-term growth prospects is that it now expects net immigration to be much higher than thought. It predicts the number of migrants will settle at 245,000 a year, rather than the 205,000 assumed in November.
This could boost the workforce by 160,000 and add 0.5 per cent to potential output in 2027, the watchdog said.
Economists said Hunt’s measures were a welcome attempt to tackle some longstanding weaknesses, but they also called attention to big omissions, including the absence of any further money for public sector pay.
Torsten Bell, director of the Resolution Foundation think-tank, contrasted the “mix of carrots and sticks” for people to work more, with the lack of “an investment-led productivity drive to help those workers earn more”.
Jeegar Kakkad, policy director at think-tank the Tony Blair Institute, acknowledged that the chancellor had tackled immediate challenges but added he had failed to address “deep, systemic issues” with planning, public services and the green transition.
“Britain needs more than a budget. It needs a plan for the future,” he said.