Michael Saunders

Briton missing in Paris.

But they are likely to return, requiring tougher choices over tax and spending in the autumn Budget.

It also is unclear how the UK will fund a further rise in defence spending to a minimum of 3% of GDP in coming years, which seems inevitable. Will the fiscal rules be changed (again) to accommodate this?

The Chancellor ducked these challenges today. …

…and infrastructure, as well as a much higher burden from debt interest payments. The latest plans imply real-terms cuts in unprotected departments and there are no plans of how to deliver this: this appears optimistic rather than realistic. …

…potential growth projections at some stage. And the Chancellor has again left little headroom against the fiscal rules, leaving fiscal policy vulnerable to even modest revisions to the economic outlook.

Moreover, there are ongoing pressures for higher public spending on health, defence…

…to which planning reform will lift potential output in the next few years, despite widespread shortages of construction workers. Their forecasts for productivity growth in coming years remain higher than most outside forecasts, and it remains likely that the OBR will have to downgrade their…

Spending cuts, but tough choices mostly ducked

As expected, the Spring Statement announced modest cuts to planned public spending to stay within the fiscal rules.

Even after these changes, the fiscal position remains vulnerable. The OBR has taken a relatively optimistic view on the extent…

If extra savings are needed elsewhere, I suggest replacing the state pension triple lock with a less generous approach and a gradual introduction of a road-usage charge, which will probably be needed eventually anyway as use of electric vehicles increases.

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Over time, higher potential growth would improve the UK's fiscal position. And reforms to incapacity benefits would probably save money while also lifting workforce participation. Some – but not all – of these supply-side measures have an initial cost.
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The Council of Economic Advisors should be expanded and given a more public-facing role. This would help highlight the longer-term gains from supply-side policies, as well as helping build a broader consensus within government and externally on measures to lift potential growth.
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We also need a broad package to raise workforce participation, including more support for childcare costs, reforms to incapacity benefits, and changes to tax and private pension enrolment for older people in work.
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Specific policies include easier visa rules for construction workers, higher allowances for intangibles investment, reforms to housing taxes, and closer trade links with the EU.
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To raise potential UK growth, I suggesta broad package of measures that include raising investment, expanding workforce participation, and boosting total factor productivity.
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…And in that case, the ensuing labour shortages and excess demand would probably prompt significantly higher interest rates, thereby eroding investment and weakening the fiscal position.

…and the fact that it takes a lot of investment to significantly raise capital stock growth.

In short, it would take a colossal rise in fixed investment to have a big effect on potential growth over 5-10 years.
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In particular, the current approach will run up against shortages of construction workers, the risk that expanding investment when the economy is already close to zero output gap will simply put upward pressure on interest rates, …

This is partly because a five-year horizon is too short to reap the full benefits of supply-side policies: a 10–20-year timeline is more realistic. But it's also because the government needs to go even further to make significant gains over that longer horizon.
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The government's policies to lift potential growth – mostly aimed at strengthening fixed investment – are a good start.
But, even so, I doubt the government's approach is sufficient to significantly raise potential growth over the next five years.
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Will the govt’s plan for growth succeed?
What else can they do?

The UK is in a low-growth rut, with real GDP per head last year little changed from five years ago.
A successful and durable strategy for lifting growth must focus on supply-side policies, i.e. those that lift potential growth.
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But, overall, this Budget marks a major step to return the UK to fiscal sustainability while not damaging - and probably improving - longterm growth prospects.

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So you certainly can’t rule out the risk that adverse forecast revisions in future Budgets could require the Chancellor to raise taxes further.

There is also much still to be done on tax reform, as well as supply-side measures to lift potential growth.

…2-3 years – for this effect to be clearly evident.

Reeves has chosen to ‘kitchen sink it’ in this Budget, with large tax hikes to cover sizeable increases to spending. Barring adverse shocks, further tax hikes will probably not be needed in subsequent years. But fiscal headroom is very limited.

The Budget will slightly reduce the extent to which fiscal policy drags on growth. But it will still be a drag rather than stimulus. Further ahead, higher public investment will lift potential growth. But it will take time and a sustained period of higher investment – more like 10 years than…

The MPC remains likely to cut rates 25bp next week and to cut rates significantly further over the coming year, returning to a more neutral position as core inflation and pay growth slow further.

The UK is set for modest growth in the next year or two.

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…fully delivered, given the lack of detail of how it would be achieved.

Third, the extra capital spending will (as OBR research has shown) help the economy’s underlying growth trend over time, thereby generating higher tax revenues that limit the eventual net cost.

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Second, this Budget makes fiscal tightening far more credible than the March Budget, because it is based on specified tax hikes rather than an implausible and unspecified squeeze on public spending. The external consensus has always assumed that the tightening in the March Budget plans would not…

…persistently high deficits and rising debts. It is very different to ‘Bidenomics’, which has seen the US structural fiscal deficit exceed 7% of GDP with a sharp rise in the public debt ratio. It is also very different from the unfunded tax cuts of Liz Truss.

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First, fiscal policy will still be tightening, with the fiscal deficit falling from 4.5% of GDP this year to about 2% of GDP in 2029/30. On the PSNFL measure, the debt ratio will start falling in 2027/28. This shift to fiscal tightening will be a marked contrast to recent outturns…

…never actually needed to fall. The current balance rule and shorter horizon for the debt rule are notable improvements.

It is unlikely that financial markets and the MPC will be greatly worried by the upward revision to the deficit profile.
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…and higher interest rates.

The changes to the fiscal rules are sensible. The previous fiscal rules allowed governments to cut investment to fund tax cuts or current spending, despite damaging effects on potential growth. The rolling five-year horizon for the debt rule meant that the debt ratio…