Poor outlook for growth could limit scope for budget tax cuts

A £30 billion boost to the government’s finances is likely to be wiped out by a downgrade in forecasts for economic growth at next month’s budget, a think tank has warned.

The Institute for Fiscal Studies said Jeremy Hunt would have limited room to announce giveaways at his first spring budget because of a lowering of Britain’s potential growth from the government’s fiscal watchdog.

The Treasury’s borrowing bill will be an estimated £31 billion lower this year, compared with forecasts made last autumn, thanks to a steep drop in global energy prices, lower payments on inflation-linked debt and strong tax revenues.

However, the think tank said the chancellor should resist calls to use the savings to fund tax cuts or spending rises in his first budget next month as the public finances would suffer from a slowing economy until 2027.

“All of what we are hearing about money being available in the short run doesn’t necessarily tell us about the money available in the long run, but it may help with some of the immediate crises,” Paul Johnson, its director, said.

The Office for Budget Responsibility is expected to slash its medium-term outlook for the economy to coincide with the budget on March 15. Last November, the watchdog published an optimistic set of forecasts that assumed the economy would bounce back strongly from a recession this year.

The institute said that the OBR was likely to raise its growth outlook for 2023, forecasting a much shallower recession than had been feared, but would lower its medium-term projection to paint a picture of a tepid recovery over the next five years.

This will hurt the chancellor’s prospects of meeting his self-imposed fiscal target to reduce the country’s debt-to-GDP ratio in the next five years and to balance day-to-day government spending over that period. The IFS said the official downgrade could result in Hunt missing the debt rule and putting borrowing on a “slightly rising path in five years’ time”.

“This judgment is extremely sensitive to the OBR’s assumptions about growth and inflation five years hence,” the think tank said. It would not be desirable for the government to take immediate policy action in response to a minor forecast change that puts it on track to miss the letter of its fiscal rules.” In November the OBR thought the economy would contract by 1.5 per cent this year, an estimate that is likely to fall to about 0.5 per cent to 0.7 per cent as falling energy prices help to cut inflation.

One area where Hunt is expected to spend is the extension of a cap on household energy bills at £2,500 a year. The cap was due to rise to £3,000 in April, but a sharp decline in market energy prices has made the subsidy cheaper for the Treasury and could mean it is maintained at the present level for the rest of the year.

The IFS said the Treasury has saved £10.9 billion on the subsidies compared with estimates made last November. These savings will be used in part to fund an expected £6 billion cut in fuel duty from April.