Whisper it, but Rishi Sunak looks to be heading into the Budget next week with the public finances in a far better state than once predicted. The Office for National Statistics update on public sector net borrowing showed September’s total — £21.8 billion — coming in several billion pounds below the Office for Budget Responsibility’s official forecast and economists’ consensus.
It fits a trend: total borrowing for 2021/22 is over £40 billion lower than expected, giving Sunak far more leeway than he thought he’d have at the start of the year. On the whole, tax receipts have been higher than forecast, as growth (while somewhat lacklustre over the past few months) has broadly been strong, with the UK still in the lead for recovery.
Meanwhile government spending has been lower than expected (the most expensive Covid support scheme — furlough — cost just over £1 billion in its last month, compared to the near-£70 billion it cost overall). This week’s inflation update will provide a bit of a boost as well: despite inflationary pressures ramping up (wages, energy and labour shortages, the list goes on), CPI fell slightly last month to 3.1 per cent — from 3.2 per cent in August — at least temporarily putting threats of the 1970s inflationary spiral at bay.
But don’t expect Sunak to stray too far from fiscal prudence (or as close to fiscal prudence as one can get in the age of pandemics and emergency spending). The Chancellor remains acutely aware that a 1 per cent rise in inflation and rates might force him to find an extra £25 billion just to service the UK’s debt (the Institute for Fiscal Studies estimates costs have risen by £15 billion this year, since it last issued its forecasts last March). And this small drop in CPI is thought to be a blip: in an interview in today’s Financial Times, the Bank of England’s new chief economist Huw Pill warns that inflation is likely to top 5 per cent in the coming months (the Bank’s official forecast is for it to peak at just over 4 per cent).
That helps to explain why Pill is setting out a new era for monetary policy: ‘If you want excitement’, he told the FT, ‘you should be looking at [interest] rates.’ It marks a major shift away from the days of vast money-printing and cheap money — something his predecessor Andy Haldane was calling for over the summer, to stop ‘pouring the punch’ and tighten policy.
Sunak’s ‘full expensing plus’ scheme came as a big surprise in March (which enables businesses to reclaim investment expenses, with a subsidy on top); now, rumours slosh around about freezes or cuts to alcohol duty. But his broad concerns over the state of the public finances are unlikely to have been swayed. If there’s any change, fiscal rules are only set to be tightened.
The bigger question, then, is what comes out of the three-year Spending Review, which will also be published next week. The Review is already coming one year later than planned, as it was scrapped last autumn so the Chancellor could focus specifically on a Budget that addressed — at the time — an escalating crisis. Sunak has been notably quieter than other ministers on the government’s net zero ambitions. Perhaps because the Treasury is hyper-aware that the ambitions aren’t cheap.
The Net Zero Review, published this week alongside the government’s strategy to reach carbon neutrality by 2050, doesn’t put an ultimate price tag on the policy, but does highlight the steep costs to households in the coming years, especially in terms of upgrading how people heat their homes. Pressures and trade-offs that won’t define the Budget next week, but maybe coming down the track sooner than expected.
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