Treasury chooses to accept £38bn extra borrowing in face of economic headwinds

OBR gives the Chancellor a £55bn fiscal black hole, double the £27bn windfall from the Autumn Statement

The weaker outlook for productivity and pay has led the OBR to give George Osborne a £55bn fiscal hole, reversing twice over the £27bn fiscal windfall it gave him in the Autumn Statement. The Chancellor has rightly chosen only to respond to the fiscal deterioration at the back end of the parliament leading to £38bn extra borrowing between 2015/16 and 2020/21, the Resolution Foundation said today (Wednesday) in the response to the Budget.

The weaker earnings outlook has reduced income tax receipts – an issue exacerbated by increases in the personal tax allowance and higher rate threshold that disproportionately benefit richer households – which are projected to be £13bn lower in 2019/20 compared to just four months ago and £52bn lower in total over the period from 2015/16. That accounts for 75 per cent of an overall reduction in government receipts of £69bn. The overall fiscal hole is smaller because debt interest projections have been reduced.

New Resolution Foundation post-Budget analysis of OBR figures shows that typical wages are now not set to return to their pre-crisis peak before the end of the parliament, finally getting there in 2020/21.

The resulting deterioration in the public finances has meant that the Chancellor has deepened spending cuts for non-protected departments, but only towards the end of the parliament. The extra £3.5bn of savings means that departments such as Work and Pensions, Business and Justice will have experienced cumulative cuts in their day-to-day budgets of over 40 per cent since 2009-10.

Torsten Bell, Director of the Resolution Foundation, said:

“The OBR has today given the Chancellor a £55bn fiscal black hole, taking away from the Chancellor twice the windfall they gave him in the Autumn Statement.

“Given the worrying global economic outlook he is right to delay dealing with the bigger deficit until the end of the parliament. But the result is £38bn extra borrowing and a considerable challenge in delivering a large consolidation in 2019/20, a pre-election year.”

“Today’s Budget is a reminder for all Chancellor’s dealing with economic volatility and fiscal forecasts – the sofa can go from being a cashpoint to a pickpocket overnight.”

On increases in the Higher Rate Threshold and Personal Allowance

David Finch, Senior Economic Analyst at the Resolution Foundation said:

“Everyone likes to pay lower taxes, but these income tax cuts will largely benefit higher income households.

“The top half of households will receive over 80 per cent of the benefit. That is hard to justify at a time major fiscal pressure.”

On the outlook for wages and productivity

Laura Gardiner, Senior Policy Analyst at the Resolution Foundation said:

“The worrying lack of catch-up growth in earnings looks set to continue with the outlook for pay far weaker than four months ago, and the OBR expecting weaker productivity growth across the Parliament.

“This will dampen the rise in living standards, while weaker income tax receipts will present a further fiscal headache for the Chancellor.

“The National Living Wage will bring welcome pay rises for millions of low-paid workers in a fortnight’s time. But unless we get to grips with our productivity crisis the overall outlook for wages – and income tax receipts – will remain muted.”

On the new Lifetime ISA

David Willetts, Executive Chair of the Resolution Foundation, said:

“I am delighted that the Chancellor has put the next generation at the heart of his Budget. Many parents worry that their children are not going to be able to afford to get started on the housing ladder or save for a pension.

“The new Lifetime Savings Account really helps with £1,000 from the Government matching £4,000 that individuals save. And this is a scheme specifically for the under 40s. I warmly welcome it.”