The OBR’s mistake was spectacular but accidental. The same can’t be said for Labour, whose Budget missteps will do nothing to shift the economy, writes Julian Jessop
After months of damaging speculation, the Chancellor delivered yet another ‘tax and spend’ Budget which will do little to tackle any of the UK’s deep-rooted economic problems.
The Chancellor’s biggest challenge was to persuade enough people that she will not just be coming back again for more next year. Only time will tell whether this gamble has succeeded – and even the bond markets seem unsure which way to jump.
On the plus side, the overall package was not quite as punishing as some had feared. The increased spending was frontloaded while the main tax increases will not kick in for several years, reducing the risk that the economy will be tipped immediately into recession.
Indeed, the lifting of at least a little of the uncertainty should allow some spending, hiring and investment to resume, perhaps leading to a bounce next spring.
The Chancellor has also given herself more headroom than expected against the fiscal targets and confirmed that the OBR will only be required to make a formal assessment of the performance against these targets once a year, rather than twice. These steps should buy a little more breathing space too.
However, for someone who prides herself on being an economist by training, this was a very political Budget. Many Labour MPs will be pacified by the further increases in welfare spending, especially the abolition of the two-child benefit cap, and by the ragbag of new or increased taxes on those with the “broadest shoulders”.
But this package will be much harder to sell to the rest of the population, especially when combined with Rachel Reeves’ decision to break the promise she made last year by extending the freeze on personal tax thresholds (and for a full three years). This is the UK’s least stealthy “stealth tax”, since everybody is talking about it.
OBR assessment is bleak
The Chancellor attempted to justify this latest U-turn by arguing that she is still fixing the mess left by previous governments, citing the OBR’s decision to downgrade its forecasts for productivity. But it is still significant that the OBR has concluded that none of the new measures in this Budget have a sufficiently material impact to prompt an upgrade.
Other key tax measures in this Budget will target salary-sacrifice pension contributions and higher value properties. These measures could easily backfire, discouraging savings for retirement and further gumming up the housing market. Higher taxes on dividends and landlords will undermine incentives to invest.
There were some gestures to “cut the cost of living”, but these measures just shifted the burden from bills to taxes, leaving households no better off. They will also lower headline inflation by just 0.4 percentage points next year, meaning inflation will still be higher for longer as a result of policy decisions made last year.
Above all, spending will still be higher than previously planned and taxes will rise even further. Relying on a dog’s breakfast of bitty tax increases is still risky, because both the revenues and the wider economic impacts are relatively uncertain.
Finally, it would be odd not to reflect on the premature release of the OBR’s analysis. This was outrageous, but at least it was accidental. In contrast, the Treasury and No 10 have deliberately engaged in selective leaks and briefings throughout this Budget process.
Moreover, these briefings were often highly misleading. Lowlights included claims that “better OBR forecasts” had allowed Rachel Reeves to drop a plan to raise income tax rates, and that the OBR had become much more pessimistic about the economic impact of Brexit.
The OBR’s spectacular gaffe should not be allowed to distract from the damaging impact that kiteflying and outright misinformation have had on credibility and confidence. This has to stop.
Julian Jessop is an independent economist and Fellow at the Institute of Economic Affairs