Chancellor Rishi Sunak used his Budget to row back slightly on his planned tightening of fiscal policy, largely by announcing what the OBR calls “a large and sustained increase in public spending”.
He announced an extra £24.8bn for governments' departmental current spending next year, meaning that the cuts of 12.4 per cent which had been pencilled in will now be cuts of only 2.1 per cent. This extra spending is by far the biggest Budget measure he announced, far exceeding the £2.2bn cut in the Universal Credit taper, £1.9bn cut in business rates for the hospitality sector or £560m of alcohol duty reform.
Despite the clamour for increased infrastructure spending, there was little change in investment spending: this is now forecast to rise 16 per cent between 2021-22 and 2024-25, compared with a 14 per cent increase planned last March.
Thanks to the spending rises, fiscal policy will tighten by less than the chancellor announced in March. One measure of this is cyclically-adjusted net borrowing. This is now projected to fall from 8.3 per cent of GDP this fiscal year to 3.9 per cent next, a tightening of 4.4 percentage points. That compares to a planned tightening of 5.5 percentage points in March. It is still a notable tightening, however, due to measures such as rises in corporation tax, the freezing of income tax allowances, cuts to Universal Credit and ongoing restraint of public spending.
Despite his giveaway in this Budget, the Office for Budget Responsibility (OBR) significantly reduced its forecasts for net borrowing. It now forecasts this falling from £183bn this year to £46.3bn in 2024-25. That compares to a projected drop from £234bn to £74.4bn in its March forecasts.
The main reason for this projected lower borrowing is that the OBR now foresees money GDP growing more quickly than it projected in March, due to higher inflation. (The OBR actually cut its forecast for real GDP growth from 10.9 per cent between 2021 and 2024 projected in March to just 9.6 per cent.) Faster nominal growth will suck in more tax revenues, more than offsetting the impact higher inflation will have in raising debt interest costs and welfare benefits. Thanks also to this, the OBR cut its forecasts for the ratio of debt to GDP, from 97 per cent for 2024-25 in March to 85.1 per cent now. To some extent, government debt is being inflated away.
The effect of these tax rises will, however, be to increase the share of taxes in GDP. The OBR foresees this rising to 36.2 per cent of GDP by 2026-27, which it says would be “its highest since the early 1950s.”
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