In a new report, the IFS suggests that, although the UK’s short-term economic outlook appears more positive than previously anticipated, concerns remain around the longer-term prospects, giving the chancellor little room for manoeuvre in his 15 March 2023 Budget.
The report The fiscal backdrop to Spring Budget 2023 notes recent forecasts that the dip in the UK’s economic output is expected to be shallower than predicted at the time of the Office for Budget Responsibility’s November forecasts. Various costs for government are likely to be lower than previously expected (for example, spending on the energy support schemes and debt interest), and tax revenues are now expected to be higher, with revenue from income tax and NICs £6.3bn above forecast for the 2022/23 tax year so far.
The report does, however, caution that the apparent good news for Mr Hunt may not translate into any significant policy give-aways (or rabbits from hats) in the Spring Budget. Cancelling the planned 23% rise in fuel duty from 1 April 2023 would cost £6bn in 2023/24 alone (the IFS suggests that going ahead with the increase ‘might be thought politically implausible’). Resolving the various public sector pay disputes is also likely to be costly, presenting the Treasury with permanent increases in spending (assuming any settlements involve consolidated pay increases) – although the IFS notes that higher public sector pay is unlikely to trigger an inflationary spiral (one of the Treasury’s concerns), given the absence of market prices in public services.
The key question for the chancellor is whether short-term fiscal improvements are likely to persist, translating into a ‘more permanent improvement in the public finances’, says the IFS. With the economic outlook uncertain, and the potential for forecasts to change, the report concludes that ‘the case for permanent tax cuts or spending increases that are not offset elsewhere is no stronger now than in the autumn’ and ‘even currently planned tax increases may not be sufficient to meet the accumulated demands on public spending’.
Isabel Stockton, senior research economist at IFS, said: ‘It is difficult to see an end to public sector pay disputes and industrial action that does not involve the Treasury providing additional funding to departments. Short-term improvements in the borrowing outlook could allow for one-off bonuses or backdated pay awards for public sector workers. But it is far from clear that these improvements will last and, if the Bank of England is right, the UK’s medium-term growth outlook may have deteriorated. Short-term savings cannot finance permanently higher spending – which is what a higher consolidated pay rise for public sector workers would entail. The Chancellor likely has less fiscal room for manoeuvre than recent headlines might suggest.’
In a new report, the IFS suggests that, although the UK’s short-term economic outlook appears more positive than previously anticipated, concerns remain around the longer-term prospects, giving the chancellor little room for manoeuvre in his 15 March 2023 Budget.
The report The fiscal backdrop to Spring Budget 2023 notes recent forecasts that the dip in the UK’s economic output is expected to be shallower than predicted at the time of the Office for Budget Responsibility’s November forecasts. Various costs for government are likely to be lower than previously expected (for example, spending on the energy support schemes and debt interest), and tax revenues are now expected to be higher, with revenue from income tax and NICs £6.3bn above forecast for the 2022/23 tax year so far.
The report does, however, caution that the apparent good news for Mr Hunt may not translate into any significant policy give-aways (or rabbits from hats) in the Spring Budget. Cancelling the planned 23% rise in fuel duty from 1 April 2023 would cost £6bn in 2023/24 alone (the IFS suggests that going ahead with the increase ‘might be thought politically implausible’). Resolving the various public sector pay disputes is also likely to be costly, presenting the Treasury with permanent increases in spending (assuming any settlements involve consolidated pay increases) – although the IFS notes that higher public sector pay is unlikely to trigger an inflationary spiral (one of the Treasury’s concerns), given the absence of market prices in public services.
The key question for the chancellor is whether short-term fiscal improvements are likely to persist, translating into a ‘more permanent improvement in the public finances’, says the IFS. With the economic outlook uncertain, and the potential for forecasts to change, the report concludes that ‘the case for permanent tax cuts or spending increases that are not offset elsewhere is no stronger now than in the autumn’ and ‘even currently planned tax increases may not be sufficient to meet the accumulated demands on public spending’.
Isabel Stockton, senior research economist at IFS, said: ‘It is difficult to see an end to public sector pay disputes and industrial action that does not involve the Treasury providing additional funding to departments. Short-term improvements in the borrowing outlook could allow for one-off bonuses or backdated pay awards for public sector workers. But it is far from clear that these improvements will last and, if the Bank of England is right, the UK’s medium-term growth outlook may have deteriorated. Short-term savings cannot finance permanently higher spending – which is what a higher consolidated pay rise for public sector workers would entail. The Chancellor likely has less fiscal room for manoeuvre than recent headlines might suggest.’
