The chancellor’s spending splurge will be more than the economy can accommodate, said the Treasury’s official economic forecaster, the Office for Budget Responsibility, which warned that a “sugar rush” of investment in housing and roads would “crowd out” the private sector.
Robert Chote, the chair of the OBR, said the government’s plans to boost investment would improve Britain’s productivity, but the sheer scale of spending would create skills shortages, rising wages, and the prospect of an inflationary surge that would force the Bank of England to step in with higher interest rates.
A Brexit trade deal creating tariffs and friction at borders, and restrictions on migrants coming to the UK, will also limit some of the benefits of the chancellor’s spending plans, he said. With trade restrictions in place and the economy suffering from a lack of skilled immigrants, the government will be forced to delay projects, or they will replace private sector activity, especially in the housing sector.
The chancellor Rishi Sunak said investment spending would increase by £170bn over the next five years to repair and expand the UK’s ailing infrastructure. Another £18bn would be spent on a boost to Whitehall budgets, with £12bn set aside in extra health spending and for tax breaks and subsidies to protect businesses and workers against the worst effects of the coronavirus outbreak.
The OBR’s GDP forecast, without fully accounting for the impact of coronavirus, was 1.1% for 2020 followed by the “sugar rush” increase to 1.8% in 2021, before falling back to 1.5% in 2022, and 1.3%, and 1.4% in the following years.
Sunak said the OBR supported his belief that there would be long-term gains from improving the nation’s infrastructure.
“They have said, in their words, that today’s ‘large planned increase in public investment should boost potential output too’,” he said. “If future governments have the same determination to continue our approach, the UK’s long-term productivity will increase by 2.5%.
“The OBR have confidence in the long-term future of our economy – and so do I.”
But Chote said the plans meant government spending would account for half of GDP growth over the next two years, and the payback for the investments would not make up for the increase in borrowing over the five years of the parliament.
The OBR chief said over the forecast, the chancellor’s measures would increase net debt “by no less than £125bn” and take the total debt pile above £2tn for the first time.
The Resolution Foundation said that while the chancellor “decisively brought an end to the era of austerity”, with big increases in current and capital spending, “none of the austerity for family budgets from social security cuts was reversed, meaning that child poverty is likely to continue rising over the course of the parliament”.
The thinktank also calculated that the increase in current spending would reverse only around a quarter of cuts to unprotected departments (outside health, defence and international development) since 2010.
Chote said the UK’s debt to GDP level, which was due to fall to around 73% under previous plans, would remain nearer 76% under Sunak’s stewardship. There was little reason to fear that this heightened level of debt would become unaffordable after two decades of falling interest rates, he said.
But Chote warned that government’s fiscal plans were “rooted in the assumption that its borrowing costs will remain relatively low, as market expectations indeed suggest.
“Rather than aim for budget balance and a clear decline in the debt-to-GDP ratio – as Philip Hammond did initially as chancellor – the new administration is content to borrow significant sums on an ongoing basis and merely to stabilise the debt-to-GDP ratio.”
The OBR’s macroeconomic adviser, the former Bank of England deputy governor Charlie Bean, said: “If your only ambition is to keep debt levels steady, then every time a shock comes along the debt rises.”
Nevertheless, the Treasury will stay within its self-imposed deficit rules that prevent the chancellor from running a shortfall in the public finances of more than 3%, though the OBR revised down its likelihood the government would meet the target from 70% to 60%.
The public finances worsened last year after the OBR revised forecasts to include government spending on student loans, which had previously been excluded from the government’s accounting scheme.
The OBR said the scale of defaults on student loans, which the government is now expected to find from the public purse, contributed to an increase in net borrowing from the March 2019 estimate of £29.3bn for this financial year 2019-20 to £47.4bn.
Every year until 2024-25 is forecast to have higher borrowing, amounting to an extra £95bn. But a comparison with Philip Hammond’s last budget in 2018 shows that Sunak will borrow £300bn more than Theresa May’s chancellor was forecast to borrow over the five years from 2019-20.
