UK Chancellor Jeremy Hunt has no greater room for budget giveaways despite the economy recovering from the pandemic faster than previously estimated, the head of the fiscal watchdog said.
(Bloomberg) — UK Chancellor Jeremy Hunt has no greater room for budget giveaways despite the economy recovering from the pandemic faster than previously estimated, the head of the fiscal watchdog said.
Statistical revisions announced last week showed the UK went into 2022 with the economy almost 2% bigger than thought and above its pre-coronavirus level, upending the narrative that Britain is lagging behind other major industrialized countries.
However, Richard Hughes, chair of the Office for Budget Responsibility, said the upgrade would not give Hunt more headroom to cut taxes or increase spending because the data was backward looking.
“It is helping us better understand our experience of the pandemic but because the revisions are to the level of GDP and not to its dynamics thereafter it doesn’t tell you as much as you might think about the outlook,” Hughes told an event in London on Monday organized by the Centre for Policy Studies. “It tells you less about the energy crisis, and rising interest rates and inflation.”
A bigger economy would normally imply more tax receipts that bring down borrowing. But, as the taxes for 2020 and 2021 have already been collected, there is no windfall for the chancellor. Hunt is expected to hold his Autumn Statement in late November.
The revisions may even be negative for the public finances, Hughes suggested, if they lead the OBR to conclude the economy is not as tax rich as thought. Officials had assumed the government was collecting more revenue for every percent of GDP growth than before the pandemic because tax receipts appeared to be surprisingly strong.
“It helps us solve a few puzzles,” Hughes said. “It looked like the tax take was very high coming out of the pandemic. As we have revised up GDP, it revises down the tax burden and other ratios.”
In March, the OBR judged that Hunt had just £6.5 billion ($8.2 billion) of headroom against his fiscal rules requiring government debt to be falling as a share of GDP in five years. All of that margin is expected to have been wiped out by higher debt-servicing costs.
Sanjay Raja, chief UK economist at Deutsche Bank, agreed that the ONS revisions were unlikely to improve the outlook for the public finances because the changes were largely cyclical, and therefore temporary, not structural, which would have made them permanent.
He added that they did help explain the scale of the UK inflation shock. The upward revisions to growth in 2020 and 2021 showed the economy was running hotter than thought when the energy crisis struck.
That “suggests less spare capacity in the economy, and therefore one more reason why the GDP rebound thereafter drove UK inflation higher coming out of the pandemic,” Raja said.
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