Britain’s prospects for progress have declined, leaving the chancellor with a multibillion-pound gap earlier than the finances in March, the federal government’s spending watchdog has warned.
In a non-public submission to the Treasury, the Workplace for Funds Duty informed Jeremy Hunt that it overestimated the prospects for medium-term progress within the financial system final yr and it intends to revise its forecasts down.
The downgrade would wipe out all the authorities’s £9.2 billion headroom in Hunt’s autumn assertion and restrict his scope for maneuver as he attracts up plans for the finances.
In November the OBR forecast that whereas the financial system would shrink by 1.4 per cent this yr it could choose up subsequent yr, with GDP averaging about 2.6 per cent over the remainder of the forecast interval. However The Occasions understands that the OBR intends to cut back its forecasts by between 0.2 and 0.5 per cent as a result of weak spot within the financial system and shortages within the labor market.
It now believes that, whereas any recession this yr might be “shorter and shallower” than anticipated, the long-term financial prospects are bleaker.
The forecasts are important as a result of they may require Hunt to pencil in additional financial savings in his March finances to maintain inside the fiscal guidelines he set in November to cut back debt.
Any downgrade can be partially offset by the lower-than-expected value of the vitality worth assure after latest falls in wholesale costs. Nonetheless, authorities sources mentioned that this might have solely a small impact on total authorities funds as a result of it could be offset by decrease revenues from the windfall tax on vitality firms.
Whereas the OBR numbers can change between now and March, the current forecasts will type the idea of Treasury planning for the finances.
“There appears to be a view on the market that Hunt immediately has all this cash to play with for tax cuts,” one authorities determine mentioned. “However that’s not the view internally. The OBR figures counsel that the prospects for medium-term financial progress will really be worse than they had been in November.”
Official figures confirmed yesterday that authorities borrowing shot as much as document ranges final month on the again of a climbing debt-interest invoice and the price of vitality subsidies for households and companies. Public sector borrowing hit £27.4 billion, the very best for December since equal information started, in response to the Workplace for Nationwide Statistics (ONS). It eclipsed the excessive borrowing of the pandemic and was far above economists’ expectations of £17.7 billion. Authorities borrowing is now £9.8 billion greater than projections from the OBR on the time of the autumn assertion. Whole UK borrowing stands at 99.5 per cent of GDP with the debt-to-GDP ratio at ranges final seen within the early Nineteen Sixties.
Mark Carney, the previous governor of the Financial institution of England, mentioned yesterday that the UK was within the “most tough” place of all the main world economies. He informed LBC radio: “Everyone’s been hit — some international locations greater than others — by the vitality shock, the UK actually has been hit by the aftermath of Covid, it has been amplified by the separation from the European Union and the mixture of these elements have weighed on the financial system.”
Additionally it is understood that Hunt has been warned by Treasury officers that though inflation has fallen from its peak quicker than anticipated, underlying inflation that features pay progress has remained greater than anticipated. He has been informed that this might end in rates of interest being pushed greater and a “longer recession and a weaker restoration”.
Hunt is beneath rising strain from Tory MPs and enterprise teams to make use of the finances to announce focused tax cuts to stimulate progress. They warn that except the federal government takes motion now to kickstart the financial system the UK will develop into trapped into anaemic progress, resulting in additional tax will increase to pay for public providers.
Senior authorities figures reject this and demand that any tax giveaways in March funded by elevated borrowing would repeat the errors of Liz Truss and danger an additional improve in rates of interest. “We should ensure that debt continues to fall with credible headroom or the dangers to the financial system can be even better,” they mentioned.
Responding to yesterday’s borrowing figures, Hunt mentioned the federal government was making “powerful choices to get debt falling”. “Proper now we’re serving to tens of millions of households with the price of dwelling however we should additionally be sure that our stage of debt is truthful for future generations,” he mentioned. “We have now already taken some powerful choices to get debt falling, and it is important that we persist with this plan so we are able to halve inflation this yr and get progress going once more.”
In The Occasions yesterday William Hague urged the prime minister to not minimize taxes. He wrote: “There isn’t any profitable place for the Conservatives that doesn’t contain being essentially the most accountable celebration on the financial system. There isn’t any profitable method for our financial system that does not embody a mixture of spending and tax incentives to assist us compete. These two truths present what to do with a reflex urge to chop taxes in any respect prices. Resist it.”