The Chancellor’s difficult choices

The Office for Budget Responsibility was designed to protect the Chancellor from accusations that he is cooking the books. If the forecasts are prepared by an independent body, there can’t be the suggestion – as there often was before the OBR’s creation in 2010 – that they have been politically influenced. But what the OBR cannot do is eliminate uncertainty.

In recent years, the likely trajectory of the financial future changed quite a lot from one month to the next: from interest rates and inflation to the Covid pandemic and Russia’s invasion of Ukraine. The OBR itself admits that it had to conduct its work without knowing the full economic implications of the war. But it has cut its growth forecast for the UK economy anyway. There is growing expectation in Whitehall that we could be in for a prolonged conflict – with sanctions remaining in place for years – which means more downgrades are likely.

So Rishi Sunak has less flexibility than the headline numbers suggest. He will come under huge pressure to help families in the autumn if the energy price cap increases substantially in October, which it almost certainly will. Debt interest payments are almost four times what they were last year – a reminder of what rising interest rates and inflation can do to the public finances.

This uncertainty explains Sunak’s relative caution. He could have spent more (or taxed less) and stayed within his fiscal rules but instead he left himself some margin. If he lifted government budgets in line with inflation that would have cost £18 billion over the course of the parliament. Instead, Sunak has chosen to focus on some immediate tax cuts.

A 5p cut in fuel duty will not compensate people for the full price increase of petrol (currently 165p a litre, up from 125p a year ago) but it will offer some relief.