Budget: Splurging Sunak bets on growth and subsiding inflation

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As someone living in Tenterden, England’s sparkling wine capital and our equivalent of Rheims (our St Mildred’s church is pretty good too, even if it can’t compete with Rheims Cathedral), I can hardly complain about the tax cut on English sparkling wine in today’s budget.

But otherwise the Chancellor is hoping that economic growth and a fairly lax fiscal stance will bail him out as inflation subsides.

The economy is clearly overheating and yet has a substantial budget deficit. At the same time the UK is dropping in the tax competitiveness league tables. With demands for increased public funding on a range of services and economic pressures on the other hand, one would have expected the Budget priorities to be reducing inflationary pressure, easing the supply constraints and reforming taxes and public services to get more from less. But we have a budget that is essentially tax and spend, though at the end the Chancellor claimed that he hoped to manage pre-election tax cuts. He is clearly hoping that the supply problems will simply go away.

He has been helped by his team’s earlier forecasting errors last March which meant that the UK’s economic growth has been running strongly ahead of assumptions. But his forecasts are put at risk by the extent of the inflationary pressures. Although it is technically the task of the Monetary Policy Committee to handle inflation, Sunak will get the blame if it all goes wrong. And UK officialdom has appeared dangerously complacent in the face of rising input prices, shortages of goods, shortages of labour and upward wage pressure, all fuelled by fiscal and monetary laxity. The inflation forecast in the Budget for 2022 has now caught up with Cebr’s forecasts with a prediction of four per cent inflation next year, even after the freezes on fuel and alcohol duties. The Chancellor is betting on inflation falling back of its own accord in 2023. Given the earlier forecasting errors, he can’t rely on his officials getting it right.

There is a new fiscal framework, slightly more lax than before. One’s suspicion is that this won’t help if inflation appears to be running out of control where the real pressures on the MPC will come from the financial markets, not the framework. Public spending has been boosted, by a total of £141 billion over the next five fiscal years. And although there are tax reliefs announced in the Budget, they pale into insignificance compared with the £17 billion a year tax rise from the National Insurance hike announced a few weeks ago and the expected yield of £7 billion from changing the system of pensions uprating.

Many of the policies adopted in the Budget reflect the fruits of research carried out by my Cebr colleagues including the changes in alcohol duty, draught relief in pubs, the freeze in fuel duty, the increased funding for the arts, the rates relief for retail and hospitality and the tax reliefs for maritime. We also approve of the reduction in the Universal Credit taper to make work pay.

Will it all work and help Rishi Sunak’s premiership ambitions? It all depends on whether inflation falls in 2023 as he forecasts. If it does, a very confident Budget might well be seen as a vote winner. If it doesn’t, all bets are off.

Douglas McWilliams is founder and deputy chairman of Cebr, the economics consultants.