Cebr has consistently pointed out that the fiscal outlook is nowhere near as bleak as official forecasts had indicated and data has emerged supporting our view, especially the borrowing data for January.
In the past week, other organisations have joined the debate. The venerable National Institute for Economic and Social Research is alleged to have claimed there is £166 billion headroom for tax cuts, a prediction which has caused the withering riposte from the Treasury: ‘Officials genuinely think they put the decimal point in the wrong place.’
This note updates the Cebr analysis as background for the Spring Budget on 15 March.
Last year’s November Budget estimated a fiscal deficit of £177 billion in 2022/23 and of £140 billion in 2023/24.
The latest estimate by OBR is that the deficit for the first 10 months of the fiscal year is running (on a seasonally adjusted basis) £30.6 billion below their November forecast. Presumably the factors that caused the 2022/23 forecast to be too low will be reinforced in 2023/24 because of even higher fiscal drag and negative relative price effect.
For fiscal drag and bracket creep the OBR predicted additional revenues of £2.9bn and £10.4bn in 2022/23 and 2023/24 respectively in their March 2022 forecast. Our latest estimates suggest that this will be considerably higher with additional tax receipts as a result of higher wage inflation of £4.7bn and £17.6bn in these years.
In addition, the government had also set aside £26.4 billion for energy and cost of living support, a substantial proportion of which is unlikely now to be required given the lower profile for gas prices.
So in theory there is up to £60 billion scope in the budget for tax cuts, which is a similar number to the £60 billion budgetary scope that Cebr suggested for 2024/25 as long ago as July last year.
Alas, life is never so simple.
Some of the savings in public spending from negative relative price effect will probably unwind as the pay settlements ending the current wave of strikes emerge. While Cebr has argued that higher pay can be justified if public sector workers raise their productivity, we are not so naïve as to expect this will fully happen, at least in the short term. We have estimated that weak public sector productivity has added £74 billion to public sector costs and it is unlikely that this cost increase will be eliminated quickly (if at all).
Second, it is arguable that a £140 billion deficit is too high in any case – if achieved it would leave net debt still on an upward trajectory skirting close to 100% of GDP. A smaller deficit would in most economic circumstances make sense.
Third, the OBR forecasts had built in an assumed trend rate of growth in potential GDP of 1.75% per annum. Since the latest data shows that economy has shown a 0.8% decline in GDP between Q4 2019 and Q4 2022 with the labour market still close to full employment, such growth looks somewhat optimistic.
Finally, it transpired (though only when the November OBR documents were examined closely) that the OBR estimates incorporated a 23% rise in fuel duty. Achieving such a rise seems fairly unlikely in the current political climate. We estimate that the revenue lost from not imposing this rise will be rather less than the Treasury has traditionally calculated but even on our own calculations it is likely that failure to impose this increase will generate a revenue loss of around £3 billion.
Taking all this into account, our best calculation is that there might be as little as £20 billion scope (and possibly less than that) for tax cuts in the Spring Budget on 15 March.
If we were recommending what to do, we would encourage a reversal of some and possibly all of the planned Corporation Tax rise from 19-26%. The UK appears to be currently uncompetitive on many measures and raising its corporate tax rate by nearly a third seems an unhelpful move in the circumstances.
But we doubt if the Budget will bring much joy to private individuals despite the more favourable fiscal climate.
For more information contact:
Douglas McWilliams, Deputy Chairman – Email: email@example.com – Phone: 07710 083652
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.