Chancellor Jeremy Hunt was accused on Thursday of gaming his fiscal rules in a way that suggests the public finances could be in a worse shape than figures contained in his Budget.
Harriett Baldwin, the Conservative chair of the House of Commons Treasury select committee, said Hunt was engaged in “fuel duty fiction” and “business investment allowance fiction” to flatter the public finances in the official forecasts that accompanied the Budget on Wednesday.
Her complaints were echoed by Paul Johnson, director of the Institute for Fiscal Studies, a think-tank, and Richard Hughes, chair of the Office for Budget Responsibility, the independent fiscal watchdog. The Treasury declined to comment.
Hunt’s main fiscal rule is to have underlying public sector net debt falling as a share of gross domestic product by the fifth year of the OBR forecasts in 2027-28.
In his Budget, Hunt achieved this with only £6.5bn of fiscal headroom to spare. “The overall outlook for the public finances still looks difficult,” said Johnson.
Hughes, referring to Hunt’s fiscal rules, said “governments are finding new ways of gaming these rules”.
“The new game is to announce an aspiration, but then say ‘I’ll only get there when my resources allow’. Well, your resources don’t allow [it], so why are you announcing this thing?” he added.
Part of the way Hunt met his main fiscal rule was to tell the OBR that the government would raise petrol and diesel duties in line with inflation every year, and would scrap his proposed new capital allowances for companies costing about £9bn per annum after three years.
But in the Budget, Hunt followed the practice of every Conservative chancellor since 2011 by freezing fuel duties for 2023-24, saying that because inflation was high “now is not the right time to uprate fuel duty with inflation”.
He also extended a temporary 5p a litre reduction, costing him in total £4.9bn in the next financial year. But in future years, the OBR forecasts assume fuel duty rises in line with inflation.
The forecasts also assume the expiry of investment incentives under which companies can write off 100 per cent of their capital spending against taxable profits at the end of 2025-26, although Hunt said he would like to make the arrangements permanent “as soon as we can responsibly do so”.
And Hunt said the government would like to increase defence spending to 2.5 per cent of gross domestic product “as the fiscal and economic circumstances allow”.
At his Autumn Statement in November, Hunt put in place tight spending plans to apply after the next election in 2025-26 that many economists think will not be sufficient to run public services in a sustainable way.
Johnson said Hunt had met his fiscal rules and balanced the current budget by relying on “a combination of tight spending plans, imaginary future increases in fuel duties, and a fiscal gain from unwillingly undoing his corporation tax change”.
“This is not a terribly sensible way of being guided by such rules,” he added.
Baldwin said the “fictions” in the Budget on fuel duties and business investment tax relief simply would not happen.
“I honestly don’t think that . . . just before a general election next year, the chancellor is going to let fuel duties rise as is predicted in the OBR’s financial outlook,” she added at an event organised by the Resolution Foundation, another think-tank.
“The same thing will probably apply to this three-year [capital allowances plan].”
Baldwin said the public finance forecasts and government policy were increasingly being driven by the fiscal rules and exaggerated the strength of the public finances.
Hughes said there were various potential government measures “that aren’t in our forecast that could easily wipe that [£6.5bn of fiscal] headroom out tomorrow”.
He added Hunt’s fuel duty policy, his temporary business investment tax reliefs and the government’s goal of spending 2.5 per cent of GDP on defence were not affordable if the government also wanted to meet its fiscal rules.
“When you combine those things, that busts [Hunt’s] rules by a country mile,” said Hughes.
The OBR on Wednesday published a memorandum judging Hunt’s fiscal rules on the basis the government decides to continue freezing fuel duties.
It shows Hunt would only meet his debt rule with £2.8bn of fiscal headroom to spare in 2027-28 compared with the £6.5bn in the main OBR forecast.
In a series of scenarios contained in the memo, the OBR also said the rule would be broken and debt would continue to rise if labour market participation was 500,000 lower than expected or if interest rates were 1 per cent higher than anticipated in the forecast.
Increases in financial market interest rates since the OBR completed its forecast before the Budget would have wiped out all of Hunt’s £6.5bn of headroom against his main fiscal rule.
This post was originally published on Financial Times