According to the old saying, a week is a long time in politics. But it would appear that 16 weeks is not an especially time in fiscal policy. Jeremy Hunt, the Chancellor, delivered his Spring Budget just 16 weeks after his Autumn Statement and, as a result, not much changed in terms of the larger macroeconomic picture.
The Office for Budget Responsibility (OBR) did have some good news for the Treasury. Since the last set of forecasts inflation data has generally come in below expectations and the OBR expect that trend to continue in the months ahead. They now see consumer price inflation falling to just 2.2% by the end of the year, down by a very material 1.4% percentage points relative to their forecast in November. That lower path of inflation means they expect interest rates to fall more quickly as the Bank of England will have more room to support growth and less cause for fretting about price pressures. In the new forecasts, the Bank’s base rate will be down to 3.5% by next Spring, a whole percentage point lower than in the previous fiscal report.
In the medium to longer term though, the big picture remains mostly unchanged. The new forecasts for 2026 and 2027 are essentially the same as those made last Autumn. Still, the better-than-expected short term picture on inflation and rates handed the Chancellor some fiscal wiggle room. If policy had been left entirely unchanged, the OBR calculated that government borrowing would have been around £10bn lower in 2024/25 and 2025/26, about £5bn lower in 2026/27 and 2027/28 and essentially unchanged in 2028/29 relative to their November forecasts. Policy though did change. Jeremy Hunt chose to spend the fiscal windfall from lower inflation and interest rates mostly in the form of a cut in NICs.
Last November’s 2p cut in employee NICS – which took effect in January – was doubled down on with a further 2p cut, costing the exchequer around £10bn annually and worth around £450 a year to an employee on the median full time salary.
Still, despite the Chancellor’s lengthy insistence on his desire to cut taxes the overall tax burden is set to remain at the highest sustained levels since the Second World War. The ratio of tax to GDP is set to hit 37.1% by 2028/29, a rise of 1.1 percentage points from current levels, with around two thirds of that increase coming from the continuing freeze in personal tax thresholds.
And with the immediate fiscal windfall spent, Jeremy Hunt has been left with leeway to hit his fiscal targets in the future. What is more, although the chancellor did not add to the coming pain in public services by reducing their future budgets further, the real terms spending cuts pencilled in for the next Parliament remain in place. Excited talk of greater use of AI – and even drones – to increase public sector productivity almost certainly can not fill the gap implied by planned real term spending cuts for departments outside of health, education and defence as large as those of the early 2010s.
Given Britain has officially fallen into recession since Jeremy Hunt’s last fiscal event, he managed to make the most of a bad hand. Things may not be looking much better, but at least they are also not looking much worse. Jeremy Hunt is unlikely to be Chancellor in the later half of the 2020s, but whoever is looks set to preside over a deadly combination of a rising tax burden and falling real terms public spending unless growth improves materially.
Home >Articles > Spring Budget 2024: Economics view - making the most of a bad hand
Spring Budget 2024: Economics view - making the most of a bad hand
According to the old saying, a week is a long time in politics. But it would appear that 16 weeks is not an especially time in fiscal policy. Jeremy Hunt, the Chancellor, delivered his Spring Budget just 16 weeks after his Autumn Statement and, as a result, not much changed in terms of the larger macroeconomic picture.
The Office for Budget Responsibility (OBR) did have some good news for the Treasury. Since the last set of forecasts inflation data has generally come in below expectations and the OBR expect that trend to continue in the months ahead. They now see consumer price inflation falling to just 2.2% by the end of the year, down by a very material 1.4% percentage points relative to their forecast in November. That lower path of inflation means they expect interest rates to fall more quickly as the Bank of England will have more room to support growth and less cause for fretting about price pressures. In the new forecasts, the Bank’s base rate will be down to 3.5% by next Spring, a whole percentage point lower than in the previous fiscal report.
In the medium to longer term though, the big picture remains mostly unchanged. The new forecasts for 2026 and 2027 are essentially the same as those made last Autumn. Still, the better-than-expected short term picture on inflation and rates handed the Chancellor some fiscal wiggle room. If policy had been left entirely unchanged, the OBR calculated that government borrowing would have been around £10bn lower in 2024/25 and 2025/26, about £5bn lower in 2026/27 and 2027/28 and essentially unchanged in 2028/29 relative to their November forecasts. Policy though did change. Jeremy Hunt chose to spend the fiscal windfall from lower inflation and interest rates mostly in the form of a cut in NICs.
Last November’s 2p cut in employee NICS – which took effect in January – was doubled down on with a further 2p cut, costing the exchequer around £10bn annually and worth around £450 a year to an employee on the median full time salary.
Still, despite the Chancellor’s lengthy insistence on his desire to cut taxes the overall tax burden is set to remain at the highest sustained levels since the Second World War. The ratio of tax to GDP is set to hit 37.1% by 2028/29, a rise of 1.1 percentage points from current levels, with around two thirds of that increase coming from the continuing freeze in personal tax thresholds.
And with the immediate fiscal windfall spent, Jeremy Hunt has been left with leeway to hit his fiscal targets in the future. What is more, although the chancellor did not add to the coming pain in public services by reducing their future budgets further, the real terms spending cuts pencilled in for the next Parliament remain in place. Excited talk of greater use of AI – and even drones – to increase public sector productivity almost certainly can not fill the gap implied by planned real term spending cuts for departments outside of health, education and defence as large as those of the early 2010s.
Given Britain has officially fallen into recession since Jeremy Hunt’s last fiscal event, he managed to make the most of a bad hand. Things may not be looking much better, but at least they are also not looking much worse. Jeremy Hunt is unlikely to be Chancellor in the later half of the 2020s, but whoever is looks set to preside over a deadly combination of a rising tax burden and falling real terms public spending unless growth improves materially.
