Laith Khalaf, head of investment analysis at AJ Bell, comments on the OBR’s economic and fiscal outlook published alongside the Spring Budget:
“The chancellor is literally going for broke with tax cuts ahead of a general election. The Budget policy decisions mean he is on target to meet his own primary fiscal target by just £8.9 billion, down from £13 billion in November, and compared to the £26 billion wiggle room left on average by Conservative chancellors since 2010. Half of this buffer assumes that fuel duty is raised from next year, which would be the first time since 2011. On top of that, the five year nature of the current target makes the forecast less certain and deviations potentially more significant. The very loose fiscal target to have debt falling in five years’ time is met by a hair’s breadth in budgetary terms.
The sugar crash for the next chancellor
“The chancellor has emptied the sweetie locker once again to hand out goodies. Workers, parents, and landlords won’t look a gift horse in the mouth, though whether these measures will move the polls remains to be seen. The economic problem is the sugar crash will be very real for the next resident of Number 11. Debt is still historically high, as is the tax burden, and current fiscal plans assume hefty cuts to unprotected public services to the tune of around 2.3% a year from 2025/26 according to the OBR. It’s a pretty bleak fiscal picture when you consider the Bank of England is in no mood to compromise on interest rate policy and the public won’t welcome Austerity 2.0 in the midst of a gruelling cost-of-living crisis. It seems unlikely that either of the main parties will try to grasp the fiscal nettle before the election, which will probably mean a healthy dose of fudge being liberally applied to their economic manifestos. Style will have to suffice over substance, personality over policy. The C-word will be centre stage – competence.
“The miraculous reappearance of economic growth could help bail out the public finances. The National Insurance cut will mean more money in people’s pockets of course, but that won’t shift the dial economically when combined with other factors, according to the OBR forecasts. The expectations for GDP growth are little moved from November as a result of this Budget, and have not changed at all in the all-important five year view. Though GDP per capita has been revised down from already uninspiring levels.
Are OBR forecasts useful?
“The OBR forecasts have themselves become the topic of hot debate, as to whether they should be so influential in determining fiscal policy. It’s true that over a quarter of a century of fiscal rules have not landed us with low levels of debt or a trifling tax burden. The OBR has only been around since 2010, and works in an advisory capacity, so really the buck has to stop with the successive chancellors who have tinkered with the rules and pushed them to their limits. Some leniency should be applied due to the extreme shocks public finances have had to shoulder in the form of the financial crisis, the pandemic and the energy crisis. The independence of the OBR is valuable in adding credibility to the UK’s fiscal plans, and the mini-Budget gave us a very clear indication of what happens when that is compromised.
“Nonetheless we could do with a wider review of fiscal policy making to consider how it might be improved. The tax system is a patchwork of sticking plasters applied on top of one another over decades. It’s riddled with anomalies, anachronisms and cliff edges which make it a nightmare to navigate. The Child Benefit Charge which the chancellor is seeking to address is just one example. Next January could witness a HMRC meltdown as small savers and investors grapple with paying income tax on their savings interest and investment dividends, and capital gains tax on share sales. If you wanted to design a tax system from scratch, it would look nothing like this.
We only have to wait one month for a tax rise
“Frozen tax thresholds have raised the stakes as more people find themselves lifted into higher tax bands, and having to confront the complexity. Jeremy Hunt says the National Insurance cut is permanent, but the tax haul ticks up again from April when allowances are frozen once again, pushing more people into higher tax bands and opening up more income to taxation. We only have to wait one month for another tax rise. The capital gains tax exemption for landlords meanwhile is forecast to raise a bit more taxation, but mainly from stamp duty as a result of increased property transactions. The Treasury are also coming for your Bitcoin gains too, by requiring crypto providers to hand over information to HMRC.
Jeremy Hunt’s legacy
“This may well be Jeremy Hunt’s last Budget. He inherited a pretty sticky wicket with high inflation, a large debt pile, and the aftershocks of the mini-Budget to contend with. On arrival, he added some much-needed stability at a time of panic in the markets, though he did then loosen the fiscal rules considerably. He naturally highlights his tax-cutting record, but in reality he has tightened the purse strings as well as loosened them. Freezing tax allowances while cutting National Insurance rates is one example of how the Treasury has taken with one hand while giving with the other. Politicians don’t like raising headline tax rates, so Hunt’s National Insurance cuts mean future chancellors will be shunted towards stealth taxes like freezing or slowly increasing thresholds to raise revenue. It does however open the door to income tax and National Insurance being merged somewhere down the line, as the combined rate becomes more acceptable to voters. Overall Hunt will probably be remembered as a safe pair of hands, if he is remembered at all. Quantity not quality threatens his legacy. Hunt is the seventh chancellor in eight years, so he’s unlikely to get a chapter of his own in the history books.”
