OBR economic forecast offers hope for recovery
Chancellor Rishi Sunak set out a three-part roadmap to economic recovery in his Budget speech on Wednesday, based on supporting businesses and individuals through the pandemic, fixing public finances and rebuilding the economy.
The Chancellor prefaced his Budget announcements with a quick summary of the Office of Budget Responsibilty’s latest forecast, which had been adjusted to accommodate “a swifter and more sustained recovery than they expected in November”, the Chancellor said.
According to the OBR, the economy will grow 4% this year to nearly double the rate of growth (7.3%) in 2022 before slowing back down to 1.7% the year after.
Looking at the longer term, the OBR expected that the UK economy would be 3% smaller than it would have been without the pandemic, the Chancellor said.
“The OBR have said that our interventions to support jobs have worked,” the Chancellor said, but unemployment was likely to hit a peak of 6% this year.
A recurring theme during the never-ending Budget build-up was the scale of public borrowing, which the OBR’s laid to rest by confirming this year’s borrowing will hit £355bn.
“That’s 17% of our national income, the highest level of borrowing since World War Two,” the Chancellor noted.
“Next year, as we continue our unprecedented response to this crisis, borrowing is forecast to be £234bn… Without corrective action, borrowing would continue at very high levels, leaving underlying debt rising indefinitely.”
While continuing to dish out billions in Covid support funds for the next six months, the Chancellor announced a freeze in personal tax allowances and thresholds and a corporation tax (CT) increase to 25% in 2023.
As first steps in addressing the government debt, the Chancellor said borrowing would fall to 4.5% of GDP in 2022/23 and continue dropping down to 2.8% in the following three years.
The need to “pay back” the national debt cut little ice with tax justice campaigner Richard Murphy on BBC2 Radio shortly after the budget.
Given the £234bn of borrowing scheduled for next year, Murphy said, “We’re going to see a lot more quantitative easing and that means actually, despite all he [Rishi Sunak] says, we’re not actually borrowing any more at all.”
Quantitative easing is the process whereby the Bank of England digitally creates money to buy back government debt that they issued. As the debt is owned by the bank and the government owns the bank, modern monetary theorists like Murphy argue that the debt peril is a convenient fiction maintained by austerity advocates.
Michael Littlewood of the Institute of Economic Affairs retorted: “The Bank of England can’t just magic up resources” for the money it spends.
Littlewood criticised the corporation tax hike for making it more difficult for the economy to “start springing back”.
Answering critics who warned that the higher corporation tax rate would drive away investors from the UK, CIOT tax policy director John Cullinane said few corporations shop around for the “very best deal in a wish catalogue”. The CT rate matters little as long as you “don't signal you’re going to move out of the pack”, he said.
Planning for the future, but missing pieces
Green growth dominated the later part of Sunak’s Budget presentation, along with the creation of a £12bn infrastructure bank based in Leeds that would finance a “green industrial revolution”.
But what is just as important for any Budget as what’s in it is what was missing. The word “Brexit” never passed the Chancellor’s lips during his speech, and as Richard Murphy pointed out, “There’s nothing for the NHS, there’s nothing for education, there’s nothing for the Justice Department.”