The OBR’s latest Economic and Fiscal Outlook effectively sets the framework for the challenge facing the Chancellor in the years ahead. The most immediately striking item is the forecast for borrowing in this financial year, which has now risen to £393.5 billion, based on the OBR’s central forecast. The downside scenario figure puts borrowing at £440 billion.
Underlying the OBR’s picture of the future path of the UK economy are a range of assumptions and projections, some of which Mr Sunak mentioned in his speech. On the OBR’s central scenario:
• The UK economy is forecast to contract by 11.3% in 2020 without returning to its 2019 level until the final quarter of 2022.
• After 5.5% economic growth in 2021 and 6.6% in the following year, growth tails off to around 1.8% in 2024 and 2025.
• Unemployment will peak at 7.5% in the second quarter of 2021 and then will fall to 4.4% by 2025.
• Borrowing will drop dramatically in 2021/22. This is the result of higher taxes in a recovering economy and an end to many of the temporary financial support measures, such as the CJRS.
• From 2022/23 onwards, borrowing will settle at around £42 billion higher than the OBR had forecast in March.
• Total public sector debt, i.e. accumulated government borrowing, is projected to rise to 105.2% of GDP in 2020/21 from just 85.2% a year ago. In this case debt will rise while GDP is expected to contract. From 2021/22 the debt/GDP ratio will peak at 109.4% in 2023/24 before falling for largely technical reasons. The last time UK government borrowing exceeded 100% of GDP was in 1960/61.
The OBR hasn’t assumed any tax increases in coming years, other than those already implicitly built into the system, e.g. frozen tax thresholds. Thus, income tax receipts are projected to be £203.6 billion in 2021/22 against £217.4 billion originally forecast in March. Forecast overall 2021/22 government income has dropped by 7% between the March and November assessments, while the corresponding increase in total government expenditure is 3.5%.
In his speech the Chancellor said “…we have a responsibility, once the economy recovers, to return to a sustainable fiscal position”. The nearest that the OBR comes to considering the need for tax rises in its report is to note that “…even on the loosest conventional definition of balancing the books, a fiscal adjustment of £27 billion (1% of GDP) would be required to match day-to-day spending to receipts by the end of the five-year forecast period”.
The £42 billion increase in the OBR’s estimate of the longer-term deficit is in line with projections from the Institute for Fiscal Studies and Resolution Foundation. Earlier this year both these organisations suggested that around an extra £40 billion a year in additional tax would be required over the medium term. That would mean raising tax receipts by about 2% of GDP from the current level of around 38%. Such an increase would require a range of measures across the full tax spectrum.