Finance minister Jeremy Hunt tried to show that Britain’s economy was turning a corner in his budget statement on Wednesday, but his chances of bolstering his Conservative Party’s fortunes before the next election look limited.
Britain will now skirt a recession, official forecasters said, allowing Hunt to spend 20 billion pounds ($24.1 billion) on measures including further energy subsidies to help households, childcare to get more people working, and investment incentives for business.
But the big picture for the world’s sixth-biggest economy remains one of weak growth and high debt, offering little room for fiscal manoeuvre to a government fighting to turn around its weak standing in opinion polls before an expected 2024 election.
The immediate outlook is less sombre: The economy is due to shrink by 0.2% in 2023, not 1.4% as previously thought. But government forecasters still expect living standards to fall more over the two years to March 2024 than at any point since records began in the 1950s.
The Office for Budget Responsibility also said fundamental weaknesses weighing on the economy were still being exacerbated by Brexit which has hit business investment since the 2016 referendum, and by the pandemic which caused half a million people to leave the jobs market, hobbling many firms.
“It all adds up to a situation in which Jeremy Hunt today has to work a lot harder than his predecessors just to keep debt from rising in normal times,” OBR Chair Richard Hughes said. “And normal times have been hard to come by in recent years.”
The OBR said there were big questions about just how many people would return to the labour market under the childcare, pension and welfare reforms that represented the key plank of the government’s pro-growth budget plan.
It also said Hunt’s three-year business investment incentives would bring investment forward at a cost to later years. The opposition Labour Party has promised “certainty, consistency and incentives for investment.”
A snap opinion poll suggested voters were sceptical about the Conservatives’ latest plan – among 3,100 people surveyed immediately after the budget by YouGov, only three in 10 thought it would be good for the economy.
Hunt sought to take a more upbeat approach in his speech to parliament.
He said the economy under his watch was “proving the doubters wrong” thanks in part to the emergency measures he took late last year when he was drafted into the Treasury to fix the “mini-budget” chaos of former Prime Minister Liz Truss.
But the fiscal rules that he and current Prime Minister Rishi Sunak adopted to calm the bond market are likely to leave them with very little space for a pre-election reversal of a tax burden that is heading for a 70-year high.
The OBR said no finance minister since George Osborne created the fiscal watchdog in 2010 had faced a tighter margin for meeting a key fiscal target than Hunt, in his case getting debt as a share of economic output falling in five year’s time.
Ben Zaranko, an economist with the Institute for Fiscal Studies, a non-partisan think-tank, said Hunt’s 6.5 billion-pound buffer for meeting his target could be eaten up easily by another freeze in fuel duty and a top-up for the health budget.
“We’re on track to meet the – relatively loose, poorly designed – fiscal rule on paper only,” he said.
Nonetheless, analysts said Hunt and Sunak were probably intending to relax their grip on the public finances between now and the next election, potentially at the cost of Britain’s recently restored fiscal credibility.
Andrew Goodwin, at consultancy Oxford Economics, said there was a high risk the OBR’s economic forecasts would prove too optimistic, making the job of hitting the five-year debt target even more challenging and raising the temptation to make hard-to-meet, belt-tightening promises out in the future.
“If the Chancellor is put in that situation, and given the timing of the next general election, he would no doubt opt for further austerity measures that take effect in the next parliament,” Goodwin said.
“It’s even more important that the government builds on the measures presented today and produces a more comprehensive plan for boosting growth.”