Rishi Sunak is reported to have asked the Treasury after he came back to power as Prime Minister, “What happened to the £30 billion surplus I left you?”

In fact, the £30 billion was a cyclically adjusted surplus of £40.6 billion in 2026/27, a long way into the future. 

Moreover, the last fiscal projections that were prepared when he was Chancellor also showed the actual (unadjusted) deficit falling to £50.2 billion in the next financial year, 2023/24.

It is worth focussing on that year because nothing done now will have a huge effect on the outcome for the current year and measures with their main effects much beyond 2023/24 have little credibility in a world so volatile that the horizon is inevitably shortened.

Four things have changed since the March 2022 Spring Statement presented by the now Prime Minister.

1) Inflation is higher – in March 2022 CPI inflation of 7.4% this year and 4% next year were predicted while now Cebr’s latest forecast is for 9.2% and 9.1% for these two years. On the whole, this reduces the deficit though there are some wrinkles such as indexed debt. And it depends crucially on the extent to which the public sector is compensated for higher inflation. Some indexation is automatic – for example, pensions and benefits, but public sector wages are more likely to rise in line with those elsewhere in the economy and below price inflation.

2) Growth is lower – in March 2022 real GDP growth of 3.8% this year and 1.8% next year were predicted whereas now Cebr’s latest forecast is for 3.8% and -1.2% for these two years. The move into recession increases the deficit significantly. It is always debatable whether restrictive policies should be implemented to adjust for a rise in the deficit because of recession. The normal conclusion is no, but current circumstances aren’t normal.

3) There is the energy support plan. The cost of this is going down but it is still likely to be £30 billion or so and could rise.

4) And there is the reversal of the plan to raise NICs, the only element of Trussonomics to remain. This is estimated to cost around £12 billion.

It was possible around the time of the Truss-Kwarteng mini-Budget, by adding up all the things that might have added to the fiscal gap and forgetting to add in those things that might reduce it, to come up with the fantasy figure of a £150 billion gap or more. But such estimates (though widely bandied around possibly by Treasury officials) were extreme.

Nevertheless, there is likely to be a funding gap. Our current estimate is that this will be about £50 billion. One element is that we think the rise in corporation tax, which the Treasury is forecasting to bring in £18 billion, will in reality bring in much less.

The £50 billion gap would in normal circumstances not need much closing in a recession. The best-known example of fiscal tightening in a downturn was the famous 1981 Budget which provoked 364 economists to write to the Chancellor claiming that recovery couldn’t take place (which of course it did). But this story is actually a myth. 

The fiscal tightening announced in the Budget was in fact quickly (and quietly) reversed and was combined with a very sharp fall in interest rates, which is not going to be repeated this year!

Sadly, one of the legacies of the mini-Budget chaos is that both monetary and fiscal policy will have to be tighter than might otherwise have been the case. 

It probably makes sense in the short-term to close about two-thirds of the fiscal gap, which is rather more than economists would normally encourage.

It is unfortunate that the reversal of the corporation tax rise has itself been reversed. This was planned when the US was planning a similar rise which has now been junked. It will leave the UK rate with the highest in the G7. 

At a time when all views of economic policy agree that attracting international investment is important, this seems a bizarre step. I am sure that it will generate far less than the £18 billion a year claimed by the Treasury – perhaps eventually more like half that and in the very long term (10 years or more) increased revenues from other taxes would offset the cost. 

Michael Devereux, who heads the corporate tax research unit at Said Business School Oxford and used to do the same for the Institute for Fiscal Studies when even I thought it was respectable, has also made the same point. And he probably knows more about this than anyone else in the country….

It is also unfortunate that two other policies, which would have supported growth and would have had minimal or possibly even negative fiscal cost, have also been jettisoned – the reduction in the top rate of tax to 40% and VAT relief on tourist shopping. 

We at Cebr were part of challenging the latter in the Administrative Court where it was discovered that the Treasury calculations (actually done by HMRC which was out of its depth) were riddled with what were called in court schoolboy errors. For example, they assumed that each rebate claim by a Chinese tour party represented just one tourist. 

As most experts on tourism know, the bulk of Chinese shopping visitors to the UK travel and claim in groups. Visitor shopping is the reason Bicester Village is equal to the British Museum as the UK’s biggest tourist attraction. While the politics of reinstating the cut in the upper rate of tax look toxic and it seems unlikely that the Truss-Kwarteng decision can be reinstated, the VAT relief for tourists should be examined in a neutral way by economists less wedded to trying to justify bad decisions than the Treasury.

But for the rest there is little joy likely on 17 November. I am expecting about £20 billion of tax rises, partly from the stealth tax of continuing the freeze on tax allowances which is unethical but may yet be the least damaging of possible changes. And an equivalent squeeze on public spending.

This will make next year’s recession even worse than had previously been forecast. About the only silver lining is that it should help bring inflation down faster than we had assumed.

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