The Budget marks a very significant easing – but not an end of austerity

Published on Public Finances and the Economy

Marriages require compromise. So we shouldn’t be surprised that the reluctant political marriage between Theresa May and Phillip Hammond has delivered a compromise Budget. Caught between the Prime Ministers promise to “end austerity”, the wish to see debt falling, and the reality of the parliamentary arithmetic making significant tax rises difficult the Chancellor has taken the lifeline of a much improved public finance forecast to significantly ease, but not end, austerity.

The Office for Budget Responsibilities’ economic forecasts underpinning the Budget are only slightly improved from those in March. Now, as then, we have higher inflation and slower growth than we’d like. The former is now easing, though the OBR’s projection is now slightly higher than it was in March, while the latter is here to stay. On these forecasts GDP per capita is set to grow by 4.9 per cent between 2018 and 2023, compared with an IMF forecast of 5.5 per cent across the rest of the G7 and 5.9 per cent in the US.

But if the Chancellor didn’t get lots of good news on the economic forecasts, he got a whole heap of it on the public finances. The OBR gave the Chancellor a £11.9bn windfall this year, and a cumulative improvement of £68bn over the next five years on the back of higher tax receipts and slightly faster growth.

Short term this has given him some wriggle room to both reduce borrowing while providing a Brexiteer friendly income tax cut in April as we leave the EU. This mainly benefits higher income families at a cost of £2.8bn. Longer term he has chosen to use up almost all (97 per cent) of the windfall to try and meet the Prime Minister’s promise to “end austerity”. By largely abandoning his fiscal objective of an actual budget surplus, Phillip Hammond has been able to raise public service spending by £28bn in 2022, and put £1.7bn into Universal Credit.

That spending boost enabled the Chancellor to say that overall spending on public services will now be rising. This is a very significant shift. But it is not quite the end of austerity he labelled it as. Existing promises of extra spending in some areas (£20bn for the NHS, while aid and defence spending keeps pace with economic growth) mean the Chancellor’s numbers imply ongoing cuts in other day-to-day public services, from prisons to local government. Which departments actually get cut – and by how much – will be a matter for the spending review next year. But unprotected departments will still, on average, see cuts in every year from 2020-21 and their per capita real-terms budgets are set to be 3% lower in 2023 than 2019.

This easing is very significant. But it doesn’t mean tough times are over. Even after today’s extra spending the growth in overall public spending is well below historic norms, meaning that the major reductions since 2010 will not be unwound. In 2022 the share of the economy spent on day to day public services will be 14 per cent, down from 18 per cent in 2010. The Budget marked a big increase in spending. But this is not a public spending splurge.

Tough times for family budgets are also here to stay. Despite the confirmation that the National Living Wage will rise to £8.21 next April, the OBR expect sluggish wage growth to continue. Pay packets are not set to return to pre-crisis levels until the middle of the 2020s – nearly two decades after problems emerged at Northern Rock. The very welcome £1,000 increase in Universal Credit Work Allowances will deliver a £630 boost to low-income families. But the cash freeze in working age benefits is set to continue next year, saving the Exchequer £1.5bn but costing a couple with children in the bottom half of the income distribution £200.

This Budget was a bigger deal than many expected – with a significant easing of austerity. But austerity has not been ended. And there will be tougher choices for Chancellors in the years ahead. Public spending will remain tight, living standards are set to be sluggish and the tax rises to meet pressures in the 2020s from our ageing society will still be needed – as and when there’s a government with the majority to deliver them.

This article originally appeared in The Times