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After much flip-flopping, Prime Minister Rishi Sunak has plumped for John Major’s winning 1992 strategy as his “narrow path” to victory in the UK general election expected to be held this year. The Conservatives will herald an improving economy, warn that voting for Labour would be risky and cut personal taxes in the Budget on March 6.
Only the last of those three remains uncertain because Sunak is beholden to the independent Office for Budget Responsibility to provide the necessary resources via its fiscal forecasts. The first version of these has not yet been shared with the Treasury or No 10.
There are good reasons to think that the fiscal watchdog will provide Sunak with a larger war chest than the £13bn of headroom it identified after November’s Autumn Statement. Since then, financial market expectations of future interest rates have fallen by roughly one percentage point and government borrowing costs have also dropped. Using the OBR’s ready reckoner for debt interest payments, this alone could provide roughly another £14bn. Add to this the likely effects of lower than expected inflation, and benefit expenditure in 2028-29 might well be revised down by roughly £4bn.
The Office for National Statistics will publish important new population projections at the end of this month that might also be significant for the public finances, although the effect depends on the balance between higher migration assumptions and longevity.
It is not all good news for the Treasury, however. Offsetting the potential gains is a likely downward revision to nominal gross domestic product — the cash size of the economy — reflecting lower domestic inflation and nominal wage increases than expected in November. This would directly lower projected tax revenues, but the scale is highly dependent on fine OBR judgments on the size and composition of economic output. If the level of nominal GDP at the end of the forecast period in 2028-29 was 1 per cent lower than forecast in November, government receipts would decline by about £14bn.
The OBR Budget forecasts are therefore likely to provide a war chest, but its size remains highly uncertain and could easily be reversed in a subsequent fiscal event. Facing these circumstances, any government that knew it would be in power for a long time would want to build up a buffer as insurance against a potentially difficult future. This is especially true at a time when an ageing population will raise pressure on public spending in the years ahead, existing plans are tight and Tory ministers know they will not raise petrol and diesel duties even though they force the OBR to assume the opposite.
Having a bigger fiscal buffer would allow the Tories to shrug off the occasional unfavourable OBR forecast and let ministers to get on with government without the endless drama. It means we can define a “Sunak survival statistic”, measuring both the proportion of any windfall saved and simultaneously the prime minister’s own view of his chances in the coming election.
If Sunak saves none of his coming war chest and blows the lot on tax cuts, the survival statistic will be zero, demonstrating that he knows his party’s chances at the election are minimal. That would be the actions of someone who merely wants to make life difficult for Labour. On the other hand, if he saves most of any fiscal windfall, the higher statistic would demonstrate that he believes he might be in power and able to effect change up to 2029.
The March 6 Budget will certainly not determine the economic future of the UK, the amount of tax we will pay in the medium term nor the quality of public services. All these things will be decided by the next government. But it will demonstrate whether Sunak thinks he will be in charge this time next year.