Experts believe that public finances may be in worse shape than the figures in the Budget.
Thursday’s accusation against Chancellor Jeremy Hunt of using his fiscal rules in a way which suggests that the public finances may be in a worse place than those in his Budget suggested.
Harriett Baldwin was the Conservative Chair of the House of Commons Treasury Select Committee. She said Hunt was involved in fuel duty fiction and business investment allowance fiction to flatter the public finances as reflected in official forecasts that were included with the Budget on Wednesday.
Her complaints were shared by Paul Johnson (director of the Institute for Fiscal Studies), a think-tank and Richard Hughes (chair of the Office for Budget Responsibility), an independent fiscal watchdog. The Treasury declined comment.
Hunt’s principal fiscal rule is that underlying public sector net delinquencies should fall as a percentage of gross domestic products by the fifth year according to the OBR forecasts for 2027-28.
Hunt was able to achieve this feat with just £6.5bn fiscal headroom. Johnson stated that the overall outlook for public finances remains difficult.
Hughes, referring specifically to Hunt’s fiscal regulations, stated that “governments are discovering new ways of gaming those rules.”“The new game is to announce an aspiration, but then say ‘I’ll only get there when my resources allow’. Well, your resources don’t allow [it], so why are you announcing this thing?” he added.
Hunt was able to meet his principal fiscal rule by telling the OBR that the government would increase petrol and diesel taxes in line with inflation each year and that he would end his proposed capital allowances for companies costing around £9bn annum.
Hunt, however, followed the tradition of every Conservative chancellor since 2011, freezing fuel duties for 2023-24. Hunt stated that high inflation meant it was not the right time to increase fuel duty with inflation.
In addition, he extended a temporary 5p per litre reduction. This will cost him £4.9bn over the next financial year. However, OBR forecasts for future years assume that fuel duty will rise in line with inflation.
These forecasts assume that investment incentives, under which companies can write 100 percent of their capital expenditure against taxable profits, will expire. Hunt stated however that he would like to make these arrangements permanent as soon as he can.
Hunt stated that the government would like to raise defence spending to 2.5% of the gross domestic product, “as fiscal and economic conditions allow”.
Hunt made a November Autumn Statement, where he set out tight spending plans for the following election in 2025-2526. Many economists believe that this will not be enough to sustain public services.
Johnson stated that Hunt met his fiscal requirements and balanced the current budget using a combination of tight spending plans and imaginary future fuel duty increases. Johnson also cited a fiscal benefit from not undoing his corporation tax changes.
He added, “This isn’t a very sensible way to be guided by such rules.”
Baldwin stated that the Budget’s “fictions” on fuel duty and tax relief for business investments would not be realized.
“I honestly don’t believe that. . . Just before next year’s general election, the chancellor will allow fuel duties to rise as predicted by the OBR’s financial outlook,” she said at an event organized by the Resolution Foundation, another think tank.
“The same will likely apply to this three year [capital allowances] plan.”
Baldwin stated that the fiscal rules were driving the public finance forecasts, and government policy, and exaggerating the strength of public finances.
Hughes stated that there are many potential government measures that Hughes did not anticipate that would easily wipe out the [£6.5bn fiscal] headroom tomorrow.He added Hunt’s fuel duty policy, his temporary business investment tax reliefs and the government’s goal of spending 2.5 per cent of GDP on defence were not affordable if the government also wanted to meet its fiscal rules.
Hughes said, “When you combine these things, that busts [Hunt’s] rules by one country mile.”
On Wednesday, the OBR published a memorandum to judge Hunt’s fiscal rules based on the government’s decision to freeze fuel duties.
This shows Hunt would have £2.8bn fiscal headroom left to meet his debt rule in 2027-28, compared to the PS6.5bn forecasted by the OBR.
The memo contained a number of scenarios. OBR stated that the rule would be broken, and debt would continue rising if the labour market participation was lower than expected or interest rates were higher than predicted in the forecast.
Hunt’s £6.5bn headroom against his main fiscal rule would have been wiped out by an increase in the financial market interest rate rates since the OBR had completed its forecast before Budget.