JayArimi HuntThe chancellor praised the improvement in UK growth forecasts as he began his budget speech to parliament on March 15. He said the country would manage to avoid a technical recession (defined as two consecutive quarters of contraction) in 2023 due to better global conditions and the government’s own economic policies. Mr Hunt later browsed the actual forecast from the Office for Budget Responsibility (OBR), the fiscal watchdog: UK economy to shrink 0.2% in 2023, instead of 1.4% contraction forecast in November (see chart).
This sense of low expectations being exceeded is baked into Mr. Hunt’s budget. Compared with the disastrous “mini-budget” of his predecessor Kwasi Kwarteng in September 2022, it is a sober and sensible thing to do. Gilt yields, the cost of government borrowing, fell during the speech (although this was more due to concerns about the health of European banks than any news from Parliament).
The message to jittery investors is clear: no more nasty surprises from the chancellor. Most policy measures were implemented in advance through leaks to the media.this OBRNotoriously sidelined by Mr Kwarteng, it judged Mr Hunt would barely meet his fiscal target of falling debt as a share of national income within five years.
This fiscal integrity has come despite tax cuts and spending increases. Mr Hunt announced the extension of the Energy Price Guarantee, a subsidy that keeps a typical household’s annual household energy bills at around £2,500 ($3,020); a tax-free child rate for those with children aged nine months to two years Conservation support; changes to investment allowances to enable large corporations to offset all their capital expenditure on plant and equipment to offset their tax bill. He also removed a lifetime cap on the amount workers can save for pensions before paying additional taxes; and finally, announced another freeze on taxes on motor fuel. According to the Financial Times, the bill will add up to £20bn a year over the next three years. OBR.
Thanks to these improved official growth forecasts and his own fiscal manoeuvres, Mr Hunt has managed to turn things around.this OBR It itself has given the Chancellor a windfall thanks to its so-called bright economic outlook. In addition to higher growth this year and next, regulators are judging that inflation will fall faster and that government borrowing costs will not rise as expected in November. These changes to the forecast increase the amount the chancellor can spend by £24.6bn.
The ruse is to present the temporary tax cuts as likely to be extended. Freezing fuel duty, for example, will take the fiscal hit to just under £5bn next financial year; the levy will ostensibly increase after that. But since the Conservatives took office in 2010, the Conservative chancellor has promised to raise fuel tax next year. No one has ever done this before and the total cost to the public finances is around £80bn.
Likewise, Mr Hunt has temporarily changed the business investment allowance (while expressing hope that the measure will eventually become permanent). The tax relief will only last three years – ensuring he meets fiscal rules that the debt falls in the fifth year of a rolling five-year period. Mr Hunt could announce an annual extension of the scheme if he wanted to.
However, such subterfuge would also reduce the benefits of the policy. Mr Hunt dubbed his plan a “growth budget”.this OBR Judge him right. Its number crunchers estimate Mr Hunt’s measures would boost economic growth by about 0.2 per cent gross domestic product In 2027-28, boost investment through tax breaks in future years and labor supply when new childcare measures are in place. This will reduce borrowing by £3bn in the next financial year and a further £1.7bn, offsetting some policy costs.
However, this extra growth will not come from higher productivity, the missing ingredient in the UK economy.this OBR Forecasting a temporary increase in investment allowances would only change the timing, not the amount, of capital spending: in other words, high investment over the next three years would be offset by lower spending thereafter. The amount of capital and productivity per worker will remain the same. Paul Johnson, director of the Institute for Fiscal Studies think tank, said it was the latest example of the chancellor tweaking Britain’s corporate tax system. “There is no stability, no certainty, and no sense of broader planning.”
Instead, the improvement in the UK’s long-term growth prospects stems from expectations of an increase in labor supply. The biggest push has come from immigration.this OBR Estimates of how many migrants will come to work in the UK after Brexit have been raised again European Union. Net migration is expected to increase by about 160,000 workers. Of the 110,000 extra UK workers, OBR Budgeting for properties, approximately 75,000 is due to childcare changes (this may be a stretch). Regulators estimate that the remainder will be stimulated or enticed to find work by changes to benefit packages, more generous pension benefits or programs to help the chronically ill find employment.
These policies may be worthwhile, but their benefits may also be overstated. For example, parents of young children are already providing a valuable service by caring for them, even though they are not paid and therefore not counted in economic output. Everything else is expensive. Some 15,000 workers are expected to remain in the workforce due to changes in pension taxation, at an annual cost to the treasury of £56,000 per person by the end of the forecast period. The Labor party has pledged to reverse this measure if elected, potentially muting its effect.
The budget also doesn’t provide much for Britain’s struggling public services, notably the healthcare system, which has been blamed for an increase in people dropping out of the workforce due to ill health. Mr Hunt’s performance exceeded low expectations. Next he needs to raise them. ■
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