rom the extension of the furlough scheme for another six months, to a return of Help to Buy mortgage subsidies, to the hike in corporation tax, the bulk of Rishi Sunak’s Budget had been briefed out in advance.
Once upon a time chancellors resigned when they were found to have leaked a Budget. Now it’s just part of a media management plan.
Some around Rishi Sunak had even attempted to spin in advance that the economic forecasts from the Office for Budget Responsibility (OBR), its impeccably independent forecaster, would surprise on the upside.
And when the chancellor stood up at the despatch box on Wednesday he did not delay in relating the welcome news that the OBR now expects a “swifter and more sustained economic recovery” thanks to the impressive vaccine rollout.
“That means growth is faster, unemployment lower, wages higher, investment higher, household incomes higher,” said Rishi Sunak.
So is that true? Did the OBR deliver reasons to be cheerful?
Only up to a point – and a rather lesser point than the chancellor’s words implied.
The OBR’s latest forecasts do have unemployment peaking lower – hitting 6.5 per cent, rather than the 7.5 per cent projected in November at its last forecasting round, before declining.
That’s a testament to the chancellor’s sensible (albeit very belated) decision to extend the furlough beyond April.
He also noted that the OBR had presented a scenario in July 2020 that showed unemployed hitting a nightmarish 12 per cent.
But that was when it was assumed Mr Sunak would follow through on his plan to end the furlough scheme that autumn.
It’s also true that the OBR’s latest forecast has UK economic output getting back to its pre-crisis peak six months earlier than before – by June 2022 rather than December 2022.
Yet on closer inspection, the OBR’s GDP forecasts show relatively little difference from before.
By 2023 we’re on the same path. And by 2026 the OBR still expects the economy to be some 3 per cent smaller than expected before the pandemic hit, unchanged from its previous pretty depressing projection.
That does not make for what many, perhaps most, economists would characterise as a strong recovery.
Could it be stronger with stimulus? The OBR’s numbers imply so.
The OBR also shows economic slack in the economy – the output gap – persisting over the next four years. Inflation does not get back to the Bank of England’s 2 per cent target until 2025 and the Bank’s interest rate, currently at 0.1 per cent, rises only to 0.5 per cent over the forecast period.
Those numbers do not imply an economy prone to over-heating and suffering a spike in inflation.
On the contrary, they suggest a rather weak recovery which could benefit from the kind of stimulus measures that think tanks such as the Resolution Foundation and the IPPR have recommended in recent weeks.
Rishi Sunak did, in fairness, increase support for the economy in the current fiscal year. The additional furlough money, support for the self-employed and emergency grants for firms adds up to around £43bn. And the temporary investment allowances for companies account for a further £12bn.
But new fiscal consolidation measures kick in in 2022/23, in the form of the freezing of the income tax thresholds and rises in corporation taxes.
That takes tax as a share of GDP to 35 per cent, a level that it’s not been sustained at in the UK since the Second Word War.
That’s caused some consternation, but it’s entirely in line with other developed economies. The question is whether it’s enough to meet spending pressures.
The chancellor has also pencilled in £4bn a year of extra department spending cuts, on top of the £12bn cuts in November’s spending review.
This will make for a very tight spending round for many in the autumn. The claim that austerity is over is looking ever more threadbare.
It’s also doubtful these cuts to department budget will actually be deliverable.
The crisis has shown us an urgent need for higher public spending in a host of areas, from social care to pandemic preparation. Then there’s the bill for repairing the damage of the past year in health and education.
“Given the substantial and mounting pressures on the NHS, schools and other services, one has to wonder whether these spending totals have been set implausibly low so as to flatter the public finance forecasts,” says Ben Zaranko of the Institute for Fiscal Studies.
The OBR has done its best, as ever, in formulating its economic and fiscal projections, but the reality is that there is an unusually thick fog of uncertainty around the outlook for the UK economy, not only for the next four years but for the remaining months of 2021.
Some think the economy is like a “coiled spring”, ready to take off when restrictions are lifted due, fired by pent up consumer demand and the forced savings of a year of lockdown.
Others fear that parts of the economy may need support and stimulus for months after it has formally opened up around the middle of the year – and that the chancellor’s medium-term tax rises and spending restraint will prove precisely the wrong medicine.
“We will have three years of fiscal consolidation before short interest rates rise above 0.5 per cent,” says Simon Wren-Lewis of Oxford University.
“In macroeconomic terms, that is crazy and reflects the focus on consolidation rather than stimulus in the budget”.
The National Institute of Economic and Social Research lamented that “there was little sign of the required support through the transition to a post-Covid economy.”
Perhaps one consolation is that another Budget is due in the autumn (this one was delayed from last November).
At that point the chancellor will have another opportunity to offer more support for the economy if the coiled spring has turned out to be a damp squib.