Last week’s mini budget has played badly both in the financial markets and in the opinion polls. The normal rule in these things is that what works politically tends not to please the markets and vice versa. It is rare that a government succeeds in getting both to agree.
Without a complete costing the government made a rod for its own back. In fact we think that the package was much smaller than the rather skimpy presentation has led people to expect and looks much closer to fiscal responsibility than the markets presume.
When we assessed the prospects for borrowing last Friday we largely used the government’s own data. But there are reasons for expecting the figures to be much less negative.
First, the government’s own costings are on the high side. The three most obvious examples where their numbers are likely to be overblown are the costing of the abolition of the 45% band, the costing of the reintroduction of the VAT relief for tourists and the cost of not raising the rate of corporation tax. Cebr has done detailed research on the upper rate bands and while there might be an early cost, eventually it is likely that the boost to economic activity from it and likely impact on migration (not least from Scotland where the tax band is proposed to remain at 46%) will make the cut at least self financing compared with the £2 billion cost built in to the Treasury figures. Cebr has also done detailed research on the cost of the reintroduction of the VAT relief and our estimates show that this will raise revenue, not cost the £2 billion in the Treasury sums as the UK will attract additional numbers of tourists. Meanwhile it seems inconceivable that had UK corporation tax been raised to one of the highest levels in the Western world it would have brought in anything like the extra £19 billion that the Treasury have estimated for 2026/27. A figure around half that seems a much more plausible estimate. Our calculation is that the £45 billion that the price tag attached to the package by the Treasury is a gross exaggeration – £25 billion seems closer to an accurate estimate.
Second, the government’s figures take no account of fiscal drag which is enhanced by the freezing of tax allowances. The IFS have calculated that other than for those on incomes above £155,000, income tax will actually go up because of this.
Third, this year and next there is likely to be substantial negative relative price effect as the cost of public expenditure goes up by less than inflation.
Finally, the price of energy is falling in Europe despite the Russians attempt to impose sanctions on themselves by damaging pipelines. This means that the cost of the energy price support package will fall once current contracts expire and gas is purchased on new contracts based on the current market price.
Our initial estimate for government borrowing in 2023/24 was £154 billion falling to £80 billion in 2025/26. But adjusting for all the overstatements, the projected level of borrowing comes down to £64 billion in 2023/24 and the government is actually forecast to run a tiny surplus in 2025/26. In real life this won’t happen of course – politicians being who they are, any surplus money will burn a hole in their pockets and will get spent one way or another.
If our calculations are right (and Cebr has a better track record on this than the Treasury) it would appear that the Chancellor has managed to burn his reputation for fiscal prudence for no good reason at all. He would have been so much better advised to have done his sums before presenting his budget to the markets.
Douglas McWilliams is Founder and Deputy Chairman of Cebr.
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