The chancellor largely stuck to his 
fiscal plans in the Budget, but the one big change was to end major spending cuts in 2018/19 – a year earlier than set out in the Autumn Statement in December. With the economy performing well, he does now see some light at the end of the austerity tunnel.
Since December, the Office for Budget Responsibility (OBR) has slightly raised its real GDP growth forecasts to 2.5% this year and 2.3% next year (see table). But the differences are minor and do not alter the underlying trend growth rate in any material way. This reflects benefits from lower than expected oil prices and higher net inward migration of workers being offset by a somewhat weaker outlook for the global economy.
The OBR has also revised down its inflation projections over the next few years, reflecting lower oil and food prices and the impact of the strong pound against the euro. This is good news for consumers, but less so for UK exporters.
Overall, tax receipts are projected to be around £4bn lower in cash terms in 2018/19 than the OBR forecast in December. This is due primarily to lower than expected inflation, fewer residential property transactions and reduced North Sea oil revenues. This is offset, though, by a slightly greater reduction in projected public spending in 2018/19, due in particular to lower than expected debt interest and welfare benefit payments.
As a result, public sector net borrowing is marginally lower than previously forecast up to 2018/19, but only by around £1–2bn per year, which is tiny compared to the margin of error surrounding any such projections.
The biggest change in the Budget, however, was the chancellor’s decision to end austerity a year earlier than planned in his Autumn Statement. The projected Budget
surplus therefore levels out at £7bn in 2019/20, which is still a healthy outcome but well below the £23bn surplus projected back in December.
As a result, total public spending is now projected to fall to 36.0% of GDP in 2019/20, marginally above the low point of 35.9% of GDP reached under Gordon Brown in 1999/2000, rather than dropping to the lowest levels seen since the 1930s, as in the December plans.
Together with reduced welfare and debt interest costs, this should significantly reduce the scale of the squeeze on departmental spending over the course of the next Parliament. In fact, the OBR estimates that this element in total spending will now be around £28bn higher in 2019/20 than estimated in December. There will, however, still be some severe spending cuts to come over the next four years in non-protected areas other than the NHS, schools, overseas aid and military equipment budgets.
The new Budget measures announced seem overall to be broadly fiscally neutral. There were giveaways on personal income tax and savings allowances, alcohol duty cuts, a further freeze in petrol duty, and support for North Sea oil activity; but these were balanced by revenue raising measures, such as a higher bank levy, further steps to combat tax avoidance and evasion, and a reduced lifetime limit on pension tax relief.
These tax rises were carefully designed not to affect directly the great majority of households, which may therefore feel better off due to the various tax cuts in the Budget. But the overall net impact on the economy will be minimal, at least until 2019/20 when austerity comes to an end a year early.
