It is traditional for the Chancellor, during his Budget speech, to thank the Office for Budget Responsibility (OBR) for its work in preparing new economic forecasts. In recent years those thanks may well have been expressed through gritted teeth as the OBR continually downgraded economic forecasts and warned of further turbulence ahead. At today’s Budget, Jeremy Hunt’s gratitude sounded more heartfelt. The new OBR numbers permitted him space to tell a more positive story without sounding deluded.
The global economic environment has certainly brightened since the last set of official forecasts in November and, five months after the ousting of Liz Truss, Britain is no longer first in the firing line for financial markets. The biggest change has been a halving in wholesale gas prices over the last few months. That directly lowers costs for firms and eases the cost-of-living squeeze on households. In dry economic terms, the sharp rise in energy prices experienced between 2021 and 2022 was a deeply negative trade shock to the UK, that is to say the price of things it has to import rose much faster than the prices of things it sells overseas, leaving the country as a whole poorer. Lower wholesale energy prices can be viewed as an easing of that shock.
Hunt was able to trumpet the fact inflation has peaked and is forecast to fall to 2.9 per cent by the end of the year and even to boast that the UK was no longer expected to suffer a technical recession – usually defined as two consecutive quarters of negative growth – in 2023. But despite the Chancellor’s best efforts, the actual details of the OBR’s assessment make for grim reading. Real household disposable income, a measure of living standards that takes account of prices, taxes and benefits, is set to fall by 2.6 per cent in 2023 following a drop of 2.5 per cent in 2022. That represents an improvement over the previous forecast but is still the worst two-year hit to living standards since records began in 1956-57. Unemployment is now expected to peak at a lower level (4.4 per cent) but joblessness is still forecast to rise over the next two years.
If last autumn’s numbers were the economic equivalent of a torrential downpour, then today’s forecasts are heavy rain; certainly preferable to what came before but not what anyone would call good weather. Despite the upgraded forecasts, the economy is still forecast to shrink by 0.2 per cent this year – the worst predicted performance of any G7 country.
That Hunt felt able to use this miserable outlook as an opportunity to reject “declinist” assumptions says more about diminished expectations than any objective assessment. For all the talk of growth being one of the government’s central objectives, the OBR expects productivity growth to remain abysmal over the next five years. It should not be understated how acute this crisis has become: the economic historians Terence Mills and Nicholas Crafts recently calculated that the undershoot in productivity growth, relative to pre-2008 performance, is the worst since the 1760s.
On the policy side, a Budget widely billed as “boring” was more eye-catching than expected. The better-than-forecast performance of recent months left Hunt with more room for manoeuvre. Compared with the November outlook, the underlying budget position has improved by almost £25bn per year due to a combination of lower energy prices and lower government borrowing costs. The Chancellor has spent around two-thirds of that fiscal windfall on his policy interventions. The biggest move was an expansion of free childcare to the under-threes. The policy has the dual benefit of both being economically sensible – measures which encourage more parents (and in particular women) to work at a time of labour shortages are well-targeted – and politically advantageous as a direct offer to young families, who will be a defining demographic at the next general election.
The devil is, of course, in the detail. The new arrangements will be phased in slowly over the coming years with most of the extra help not expected until after the immediate cost-of-living crunch has abated. Still, the Chancellor should be praised for taking long-demanded action, especially since he may no longer be in office once the benefits are felt. Similarly, the move to allow firms to deduct the cost of their capital spending from their tax bills is another welcome step which should help address an economic problem – chronic weakness in business investment – but which will do little to support growth in the near-term.
Hunt played a bad hand relatively well today. He made some sensible decisions for the medium term and avoided any obvious blunders. But his attempt to spin the economic outlook as anything other than grim may not age well. While a technical recession will hopefully be avoided, 2023 will still feel like a recession for most people as real incomes fall and unemployment rises. Telling people that things are getting better while they still feel worse off is always a risky strategy.