Rishi Sunak should have received a short-term windfall as he drew up his budget plans, thanks to a better-than-expected economic performance since March.
The independent Office for Budget Responsibility is likely to upgrade its growth forecasts for the UK this year, and cut its estimate for borrowing.
That would give the chancellor some room for manoeuvre, which could be put towards investing in public services, reducing borrowing, or set aside as a ‘rainy day buffer’ — which could later be used as a pre-election war chest, if conditions allow.
Economists believe the OBR will predict the UK economy will grow by around 7% in 2021. That would be a sharp upgrade on its previous forecast of 4%, and the strongest growth since the second world war (after shrinking 9.7% in 2020, the worst slump in a century).
Faster growth leads to higher tax receipts, creating less near-term pressure on the public finances.
The fiscal watchdog could also cut its forecasts for unemployment, which at 4.5% is currently below the OBR’s forecast for a peak of 6.5%.
Borrowing so far this year has undershot the OBR’s predictions, and the EY Item Club estimates full year borrowing will come in at just over £200bn, well below the OBR’s forecast of £234bn.
But the supply chain crisis, rising prices in the shops, and the energy price crunch mean squeezed households won’t feel the Chancellor’s ‘age of optimism’. Plus, we’ve already had large increases in corporation tax and national insurance and the freezing of income tax thresholds earlier this year.
Inflation is also threatening the government’s longer-term fiscal plans, as it pushes up the cost of repaying the UK’s national debt, which has soared over £2.2trn under the pandemic.
Sunak has previously warned that a one percentage point rise in inflation, gilt yields and short-term interest rates would add £25bn to the cost of borrowing [although that’s less of a risk if it’s accompanied by faster growth and a higher tax take].
Plus, borrowing costs remain low by long-term measures:
Investec economist Philip Shaw says Sunak has two objectives today:
First, after the combination of plunging GDP over the pandemic and the huge fiscal support given to the economy, borrowing and outstanding debt have risen sharply. He must continue to endeavour to direct the public finances towards longer-term sustainability. Second, we presume that the Chancellor will aim to create some space for pre-election tax cuts.
On both of these objectives he faces constraints such as; higher inflation, which pushes up the cost of index linked debt; a risk of stalling growth from (for example) component shortages; and the political need to provide near-term, targeted assistance to see households and firms through a period of higher energy bills. Under these circumstances he will also continue to be under huge pressure to backtrack official policy to reverse the temporary relief via Universal Credit.
The OBR could also reduces its estimate of the long-term economic “scarring” caused by the pandemic from 3% of GDP, perhaps to 2%. That would mean stronger future growth and tax receipts, which could create space for extra spending, or tax cuts, before the next election.
Good morning. Budget day is always an exciting moment at Westminster, but one of several unusual characteristics of today’s statement is that Rishi Sunak will be delivering it several weeks after announcing by far its biggest fiscal component. The £12bn a year health and social care levy unveiled in September was almost certainly more significant than any of the single tax measures we will hear today.
Another feature of this budget is that it was proceeded by an unprecedented amount of pre-briefing by the Treasury. We have had 19 press releases already about what it will contain.
So, what is going to make the statement we’re getting this afternoon significant, or memorable? There are probably two aspects that will stand out.
First, don’t despair, there will be news. This is a spending review, as well as a budget, and that means we will learn much more about departmental spending than we do in a normal budget. Also, for presentation reasons, the chancellor is going to want to have the usual surprise for MPs, and for the country, at the end of his speech. There is a lot of speculation this morning about quite what it will be, and on the Today programme Andy Burnham, the Labour mayor of Greater Manchester, suggested it could come in the form of a U-turn on the £20-per-week universal credit cut.
Second, as or more important than the multiple announcements on tax and spending will be the overall story that Sunak seeks to tell the country. He delivered his first budget in March 2020, but within a week he effectively had to tear it up because of the Covid pandemic and ever since his chancellorship has been dominated by dealing with that crisis. This will be the first budget he has written not dominated by Covid, and looking ahead to a more normal economic environment. It will be a moment of definition. Sunak presents himself as a fiscal conservative, with a picture of Nigel Lawson on display in the study. But he works for a prime minister whose economic model is more tooth fairy than Milton Friedman, and so the budget will have to resolve those tensions.
As Rowena Mason reports in her overnight preview, Sunak will accommodate Boris Johnson’s innate boosterism in his speech by declaring that we are in an age of optimism. Sunak will say:
Today’s budget begins the work of preparing for a new economy post Covid.
An economy of higher wages, higher skills, and rising productivity.
Of strong public services, vibrant communities and safer streets.
An economy fit for a new age of optimism.
That is the stronger economy of the future.
For millions of people facing rising living costs, it may feel more like anything but.
The cabinet met at 8.30am this morning, and Sunak is briefing his colleagues on the budget. Here is the agenda for the day.
12pm: Boris Johnson faces Sir Keir Starmer at PMQs.
12.30pm: Rishi Sunak delivers the budget.
1.30pm: Office for Budget Responsibility publishes the October 2021 Economic and fiscal outlook
2.30pm BST: Richard Hughes, chair of the Office for Budget Responsibility, holds a briefing about the OBR budget forecasts.
I will be writing the blog all day with my colleague, Graeme Wearden. We will be covering the build-up to the speech, the statement itself, and then focusing on reaction and analysis, and in particular trying to identify the small-print surprises that Sunak may have glossed over.