Hunt gets back on the boring track — but where’s the vision?

To be fair to the chancellor, he hasn’t had much help from the Office of Budget Responsibility, whose independent forecasts underpin the budget. The OBR revised its forecast for economic growth in 2023 and 2024. But it revised its forecasts of growth in subsequent years. The net result is that despite the bright near-term outlook, it assumes the overall size of the economy – and therefore its ability to generate tax revenue for the Treasury – will remain largely unchanged until 2027/28. This may seem like an aeon away, but it is significant because the Chancellor’s main fiscal rule is that debt as a share of GDP must fall in five years’ time.

Accordingly, while the immediate outlook for the economy has improved since the Chancellor’s last financial statement in November, it hasn’t produced much cash for them to splash. His signature policy was a £4 billion childcare package that extends free nursery places for children under the age of two. He also managed to increase the tax-free lifetime allowance for pension savings, freeze fuel duty (again), increase defense spending and retain the energy price guarantee for utility prices at £2,500 for the average household (rather than raising it to £3000 as had been planned). And he retained about £6.5 billion of headroom against his main fiscal rule, which could leave him room for some modest pre-election gifts next year.

But these are relatively small measures in the grand scheme of things, despite the Chancellor’s lofty rhetoric. The bigger picture is that this was a boring budget. That was partly by design. Following the truce/quarantine “mini-budget” debacle last autumn, the chancellor’s main aim is to keep bond markets on edge – especially given the problems that are brewing in the global banking system.

But while it is better to be fiscally boring than fiscally reckless, there is a risk that policy-makers neglect to tackle the deeper problems hanging over the UK economy. The biggest of these is the need to reinvigorate economic growth.

The UK economy grew at an average rate of 2.9% per year in the decade before the global financial crisis in 2007/08. But in the 10 years before the pandemic, the growth rate averaged only 2% per year. Growth in per capita GDP has been even weaker, averaging just 1.3% per year. This has real world consequences: it is per capita GDP growth that ultimately determines what happens to the standard of living.

With this in mind, the Chancellor called her speech “a budget for growth” and argued that new investment sectors, tax increases for business investment and the expansion of free childcare would help to achieve this aim. But the truth is that boosting long-term growth will require deeper reforms in many more areas of the economy, including education, trade, the tax system, public services and, most controversially, the taxation and regulation of land. His speech had little of substance to say about any of these issues. To make matters worse, accompanying documents suggest we are going backwards in some areas – with public investment, a key pillar of long-term growth, falling to 3.7% of GDP in 2023/24 to 2027 / is estimated to be 3.3%. 28.

The OBR’s decision is revealing. After all the measures in the Chancellor’s Budget are taken into account, it is assumed that by 2027/28 the economy will be around 0.5% larger than before and that trend growth will remain broadly unchanged. So much for a pro-growth budget.

The big risk here is that the longer low growth continues, the more we start to normalize it – and the longer the standard of living stagnates. The Chancellor’s budget included some attractive measures but more radical thinking will be needed to set the UK on the path to greater prosperity.

Neil Shearing is chief economist at Capital Economics Group, an independent global research consultancy.