Chancellor Rishi Sunak announced a reversal of fiscal austerity in this week’s Budget, promising what he called “the largest sustained fiscal boost for 30 years.”
Although he announced measures to help combat the economic damage caused by Covid-19 such as cuts in business rates and support for smaller companies’ sick pay bills, his plans to raise spending extend well beyond the likely duration of the virus. He envisages overall government spending being £48.8bn higher in 2023-24 than predicted last year, with taxes rising by only £7.6bn mostly as a result of scrapping planned cuts to corporation tax. That’s a fiscal easing of £41.2bn, equivalent to 1.5 per cent of GDP then.
Another measure of the fiscal stance is cyclically adjusted net borrowing. The OBR envisages this rising from 2.2 per cent of GDP last year to 2.4 per cent this year and three per cent in 2021-22. This suggests the biggest fiscal loosening will come not during the impact of Covid-19 but this time next year.
Despite his talk of the biggest infrastructure spending since 1955 – with public sector net investment forecast to rise to three per cent of GDP by 2023-24 – most of the spending increase is actually on current, or day-to-day spending. This is forecast to be £27.7bn higher in 2023-24 than forecast last year, with capital spending being only £21.1bn higher. Details on where the spending will be announced in July’s spending review.
Official forecasts, however, show that the fiscal easing will not lead to stronger growth than previously expected. The OBR expects real GDP per person to grow by an average of 1.1 per cent a year from 2020 to 2023, the same rate it expected last March. This is well below long-run historic averages: in the fifty years to 2007, it grew 2.4 per cent per year.
Such weak growth is not because the OBR doesn’t expect the fiscal boost to work. It says it will “deliver a boost to demand” and that higher public investment “should boost potential output too”, although most of this benefit will come after 2024. Instead, the OBR believes the fiscal stimulus will just offset the adverse impact on the economy of tougher migration controls; weaker productivity caused by recent low business investment; and “the adverse effect of higher trade barriers”.
In several senses, the Budget represents a repudiation of the policies of former Chancellor George Osborne. The OBR says Mr Sunak’s plan for current spending “completes the reversal of the cuts to real departmental spending per person undertaken by the Coalition Government.” And his belief that public sector investment and fiscal activism can boost the economy’s supply potential are also rejections of austerity thinking. Although policy has changed, however, the medium-term economic outlook has not: it is for much weaker growth than we enjoyed before the financial crisis.