Four things have changed since the March 2022 Spring Statement presented by the now Prime Minister.
1) Inflation is higher – in March 2022 CPI inflation of 7.4% this year and 4% next year were predicted while now Cebr’s latest forecast is for 9.2% and 9.1% for these two years. On the whole, this reduces the deficit though there are some wrinkles such as indexed debt. And it depends crucially on the extent to which the public sector is compensated for higher inflation. Some indexation is automatic – for example, pensions and benefits, but public sector wages are more likely to rise in line with those elsewhere in the economy and below price inflation.
2) Growth is lower – in March 2022 real GDP growth of 3.8% this year and 1.8% next year were predicted whereas now Cebr’s latest forecast is for 3.8% and -1.2% for these two years. The move into recession increases the deficit significantly. It is always debatable whether restrictive policies should be implemented to adjust for a rise in the deficit because of recession. The normal conclusion is no, but current circumstances aren’t normal.
3) There is the energy support plan. The cost of this is going down but it is still likely to be £30 billion or so and could rise.
4) And there is the reversal of the plan to raise NICs, the only element of Trussonomics to remain. This is estimated to cost around £12 billion.