The Spring Statement was supposed to be a fiscal non-event, but instead, it is shaping up to be a mini-Budget. We have been primed, however, to expect only spending cuts – not tax rises (and presumably not tax cuts either). So what can we expect?
So far, Liz Kendall has announced changes to welfare benefits that are supposed to save £5 billion a year by 2029–30, the last – partial – financial year of this parliament. In addition, it has been mooted that reforms to government administration – perhaps meaning up to 50,000 job losses in the civil service – will save £2 billion by the same year.
Why the urgency for cuts? Because Rachel Reeves is in danger of breaking her fiscal rules, which demand that the government be running a current account surplus by 2029–30. In October, the Office for Budget Responsibility (OBR) forecast, on the strength of changes announced in the Budget, that Reeves had a 54 per cent chance of meeting this rule, with a central prediction that the government would run a current account surplus of £9.9 billion in that year. The £9.9 billion figure has frequently been referred to as Reeves’s ‘fiscal headroom’.
The October Budget was dominated by tax rises, yet overall, the changes announced in the Budget were predicted by the OBR to take the Chancellor further away from conforming to her fiscal target. Without the Budget, the OBR forecast that Reeves would have had £22.7 billion in fiscal headroom.
But these are all fantasy figures. When did an economic forecast five years ahead ever turn out to be even nearly accurate? We are just five months into the five-year period for which the OBR was forecasting, and already the real-world figures for borrowing and spending have diverged substantially from the predicted path. In October, the OBR forecast that public spending for the current financial year, 2024–25, would come in at £1.276 trillion, while receipts would be £1.149 trillion. That would leave a deficit of £127 billion.
However, when January’s borrowing figures were published, they showed that the government had already been forced to borrow £118.2 billion in the first ten months of the financial year. That figure was £12.8 billion higher than it should have been had borrowing conformed to the path that the OBR predicted in October. In other words, Reeves’s fiscal headroom has already been eradicated just months into the forecast period.
Just what is the point of a Chancellor reeling off an economic forecast for five years hence when the nation’s beancounters-in-chief can’t even manage to forecast a few months ahead? The idea of running a fantasy surplus five years hence may appeal to a tidy mind like Rachel Reeves’s, but events are inevitably going to undermine her best-laid plans. There is a truism about economic forecasting that goes largely unsaid: everyone knows it is a waste of time, and yet no one in government is brave enough to tell the OBR to pack it in. It comes down to human insecurities: we tend to attach ourselves to information even when we know it is likely to be useless because we feel it is better than nothing.
Just what is the point of a Chancellor reeling off an economic forecast for five years hence when the nation’s beancounters-in-chief can’t even manage to forecast a few months ahead?
The main cause of January’s worse-than-expected borrowing figures, by the way, was disappointing receipts from self-assessed tax returns. Either the self-employed are not working as hard as the OBR thought they were, or they are avoiding tax in various ways. That tells us something important. When chancellors jack up taxes, they may think it puts extra revenue in the bag – but not if, simultaneously, they are dissuading people from earning or encouraging them to reassess their tax affairs.
The taxes received in January are based on tax returns for the year 2023-24 – before Rachel Reeves became Chancellor. They are more a reaction to the tax changes instigated in Jeremy Hunt’s emergency Budget in October 2022, soon after the unwinding of Kwasi Kwarteng’s mini-Budget the previous month and the subsequent bonds crisis. Nevertheless, they sound a warning for Reeves that her own tax rises may end up producing rather less revenue than she had hoped.
Reeves will be right if she avoids further tax rises in the Spring Statement, but the spending cuts she has so far hinted at are unlikely to make much more than a token impact on the lousy public finances. The underlying problem is that no government in 22 years has succeeded in balancing the books – with the result that we are spending over £100 billion merely servicing burgeoning public debt. Either Reeves will announce far deeper spending cuts than she has so far suggested – unlikely – or she (or quite possibly her successor) will find herself in no better a fiscal position when it comes to the official Budget in the autumn.
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