UK Budgets tend to fall into one of three groups: those that define entire eras, those that fade quickly from memory, and those that include a number of eye-catching measures but ultimately fail to meet the moment. The Budget delivered by Chancellor Jeremy Hunt is likely to fall into the latter camp.
To be fair to the Chancellor, he didn’t get much help from the Office for Budget Responsibility, whose independent forecasts underpin the Budget. The OBR revised up its forecast for economic growth in 2023 and 2024. But it revised down its forecasts for growth in later years. The net result is that, despite a brighter near-term outlook, it reckons the overall size of the economy — and therefore its ability to generate tax revenues for the Treasury— will be broadly unchanged by 2027/28. This may seem like eons away, but it is important because the Chancellor’s main fiscal rule is that debt as a share of GDP should be falling in five years’ time.
Accordingly, while the immediate outlook for the economy has improved since the Chancellor’s last fiscal statement in November, this has not produced oodles of cash for him to splash about. His signature policy was a £4 billion childcare package that extends free nursery places to children under the age of two. He also managed to increase the tax-free lifetime allowance for pension savings, freeze fuel duty (again), increase defence spending and maintain the Energy Price Guarantee for utility prices at £2,500 for the average household (rather than increase it to £3000 as had been planned). And he maintained headroom of about £6.5 billion against his main fiscal rule, which may give him space for some modest pre-election giveaways next year.
But despite the Chancellor’s lofty rhetoric these are relatively small measures in the grand scheme of things. The bigger picture is that this was a boring Budget. That was partly by design. After the debacle of the Truss/Kwarteng “mini-Budget” last autumn, the Chancellor’s main objective remains to keep the bond markets on side — particularly given the problems that appear to be brewing in the global banking system.
But while it’s better to be fiscally boring than fiscally reckless, the risk is that policy-makers are neglecting to tackle the deeper problems that hang over the UK economy. The biggest of these is the need to reinvigorate economic growth.
In the decade prior to the global financial crisis in 2007/08 the UK economy grew by an average of 2.9% a year. But in the 10 years prior to the pandemic, growth averaged just 2% a year. Growth in GDP per head has been even weaker, averaging just 1.3% a year. This has real world consequences: it is the growth of GDP per capita that ultimately determines what happens to living standards.
With this in mind, the Chancellor called his speech “A Budget for Growth” and argued that new investment zones, increased tax breaks for business investment and the expansion of free childcare would help achieve this objective. But the truth is that raising long-term growth will require deeper reform across many more areas of the economy, including education, trade, the tax system, public services and— most contentious of all — the taxation and regulation of land. His speech had little of substance to say about any of these issues. To make matters worse, the accompanying documents suggest we are going backwards in some areas— public investment, which is a core pillar of long-term growth, is projected to fall by 3.7% of GDP in 2023/24 to 3.3% in 2027/28.
The OBR’s judgment is revealing. After accounting for all of the measures in the Chancellor’s Budget, it reckons that by 2027/28 the economy will be about 0.5% larger than it previously thought and that trend growth will be broadly unchanged. So much for a pro-growth Budget.
The big risk here is that the longer low growth continues, the more we will start to normalise it— and the longer living standards will stagnate. The Chancellor’s Budget contained some eye-catching measures but more radical thinking will be required in order to set the UK on a path to greater prosperity.
Neil Shearing is group chief economist of the independent global research consultancy Capital Economics
