WIREDGOV

How might recent economic developments affect the outlook for the public finances, and what does this mean for the Chancellor’s options at the Budget?

Last year’s fiscal furore culminated in the November 2022 Autumn Statement. There, Jeremy Hunt confirmed the reversal of the majority of Kwasi Kwarteng’s ‘mini-Budget’, loosened the government’s fiscal rules, and pencilled in a raft of tax rises and spending cuts for after the next general election.

The forthcoming Budget – Mr Hunt’s first – promises to be a more restrained affair, though the Chancellor still has a bulging in-tray. Here, we consider how the outlook for the public finances has changed since the autumn and what this might mean for the Budget, with a particular focus on some of the key choices and challenges around public services and pay. Our key takeaway is that while developments since the autumn provide some positive fiscal news in the short term, it is far less clear that these improvements will persist into the medium term, where the outlook remains highly challenging. Indeed, even if the outlook for borrowing in the medium term has improved since November, it is still likely to be worse than forecast a year ago. The room for either permanent tax cuts or spending increases that are not offset elsewhere remains very limited.

An improved short-term outlook for the public finances

The short-term economic and fiscal news since the Office for Budget Responsibility (OBR) published its November forecast has largely been positive. The recession is now expected to be much shallower, with all but one of the independent forecasters surveyed by HM Treasury in February, as well as the Bank of England, now expecting a smaller contraction of the UK’s economic output in 2023 than under the OBR’s November forecast. In-year borrowing figures, similarly, have outperformed the OBR’s forecast, with borrowing in the current financial year now running £31 billion below forecast on a like-for-like basis. (The OBR forecast and the ONS out-turns temporarily differ in their treatment of reforms to the student loan system; we adjust based on the OBR’s estimate of the impact.) At 1.2% of national income, this is a large difference: the median absolute forecast error for the in-year borrowing forecast over the lifetime of the OBR is much smaller at 0.4% of national income.

This reflects a number of factors. First, energy prices have fallen, reducing the fiscal cost of the Energy Price Guarantee. Over the financial year so far, central government has spent an estimated £6.8 billion less on subsidies (the bulk of which relate to energy subsidies for households and businesses) than forecast in November, and this number is likely to grow during the remainder of the lifetime of the energy support schemes. Under the latest expectations for energy prices, we expect the household element of the Energy Price Guarantee to cost £1.9 billion in 2023–24 (a saving of £10.9 billion compared with the November forecast). This boost to the public finances from lower energy prices is partially offset by reduced revenues from the energy profits levy. But this effect is smaller: £1.6 billion over the financial year so far (compared with a roughly £6.8 billion reduction in spending on support schemes over the same period) and with no further change expected during the rest of 2022–23 due to the timing of payments. Offsetting some of this, the Budget will see some cost for the business element from April 2023 which will be incorporated into the OBR forecasts for the first time, but we do not currently expect this to come at a very significant fiscal cost. If, as currently expected, energy prices drop below the support level provided by the Energy Price Guarantee from July 2023, this would eliminate government spending on this scheme from this point, but would also bring wider economic benefits. It does, however, remain the case that energy prices are very volatile.