Borrowing to fall by £29bn over the parliament as Budget set for first fiscal improvement in three years 28 February 2017 Healthier-than-expected tax receipts, the absence of any immediate post-referendum slowdown in growth and measurement changes are set to lower Budget borrowing forecasts by £29bn between 2016-17 and 2020-21, according to the Resolution Foundation’s pre-Budget outlook published today (Tuesday). Economy Drive, which brings together economic data published since last November’s Autumn Statement to assess the kind of economic forecast the OBR will deliver on Budget day, says that public sector net borrowing is on course to fall to around £56bn in the current financial year. This would be £12bn lower than the OBR forecast in November and almost exactly in line the OBR’s pre-referendum forecast from George Osborne’s last Budget in March 2016. The Foundation expects the scale of the improvement in the borrowing forecast to fall back over time, leaving borrowing projections for the remainder of the Parliament below those expected at the Autumn Statement but above pre-referendum forecasts. The report says this reflects the fact that, despite upward revisions to near-term growth forecasts in response to the absence of any immediate post-referendum slowdown, most independent forecasters have largely retained their expectations for slower growth over the next two years in particular. Taking the near- and medium-term outlooks together, the Foundation projects that the OBR will lower its cumulative borrowing figure for the six years from 2015-16 by £29bn. That would leave the deficit at £16bn in 2020-21. The cyclically-adjusted net borrowing figure, which serves as the Chancellor’s preferred metric for his fiscal rule, is also projected to fall. The Treasury is projected to have a £31bn (or 1.4 per cent of GDP) buffer against the Chancellor’s intentionally loose fiscal target of 2 per cent of GDP in 2020-21. While improved forecasts since the Autumn Statement are welcome, the Foundation notes that borrowing as a share of GDP in 2016-17 will still be significantly higher than the pre-crisis average – nearly a decade on from the run on Northern Rock. The Foundation cautions against the Chancellor using up what headroom he has, as this high borrowing level is combined with significant uncertainty as the UK starts the process of leaving the European Union. The report notes that the previous two fiscal events were accompanied by cumulative public finance deteriorations of £50bn and £100bn. But the report says that even without major borrowing increases there remains a strong case and scope for radicalism in the Spring Budget, particularly if the Chancellor reprioritises his tax and spending commitments. It calls on the Chancellor to use his last ever Spring Budget to make headway into three big structural problems facing the UK economy, some of which pre-date the financial crisis. These are: Address the UK’s shrinking tax base. In the decade between 2010-11 and 2020-21, changes to just three taxes – fuel duty, corporation tax, and income tax – are set to cost the Exchequer £45bn. These cuts have failed to spur investment, left government tax receipts overly reliant on a shrinking number of high earners and have too-often benefited richer households. As well as rethinking planned tax cuts, the Chancellor should bring the tax system up to speed with the modern workplace, for example by reforming the National Insurance treatment of the self-employed. Address Britain’s regional, generational and income divides. The tax and benefit policies inherited by the new government are set to cause the biggest increase in inequality since Margaret Thatcher’s last term of office, with low and middle income families set to lose the most. To tackle this, the Chancellor should reconsider cuts to Universal Credit, which will weaken work incentives at a time when its roll-out is about to stepped up across the UK. Much needed additional funding for social care will be particularly welcomed by baby boomers, and could be matched by a focus on house building that would provide a similar fillip for younger generations. Wean the economy off its reliance on consumption. Private consumption accounted for more than 100 per cent of GDP growth in 2016, leaving the economy exposed to expectations of household income growth slowing this year as inflation picks up. Tackling this reliance will mean addressing the fact that one-in-three firms report that they have under-invested relative to the opportunities they have faced over the past five years. This means delivering on the promise of significant corporate governance reform and ensuring tangible improvements in the investment landscape. Matt Whittaker, Chief Economist at the Resolution Foundation, said: “The public finances have performed better than expected since the Autumn Statement and look set to give the Chancellor a Budget boost of around £29bn. As a result, the Budget on 8 March is set to produce the first reduction in borrowing for three years. “But high levels of borrowing, which remain well above pre-crisis norms, combined with a highly uncertain economic outlook mean that significant challenges remain for the Chancellor. “Alongside the significant challenge of the public finances, Phillip Hammond should focus on the sober task of addressing some of the UK’s big structural problems. With last year’s growth driven entirely by consumption, the prospect of a significant slowdown in household income growth in the coming years raises serious questions over sustainability. “For households across Britain, the living standards story of this parliament risks being one of anaemic growth and rising inequality. Government tax and benefit policy is currently set to compound the squeeze for low and middle income families. Changing those plans, so that instead of directly raising inequality the government is reducing it, would be a step in the right direction.”
