The Office for Budget Responsibility (OBR) has given Rishi Sunak its new worry list. It gives the Chancellor little wriggle room for potential Budget generosity.
Every alternate year the OBR must issue a Fiscal Risks Report (FRR). Unlike the six-monthly economic outlooks the OBR produces for Budgets and (theoretically) Spring Statements, the FRR takes a longer view of the UK’s financial position and the risks it faces. Past reports have been, in the OBR’s words, “encyclopaedic”, but in 2021, the FRR focused on just three areas:
- Coronavirus (Covid-19) pandemic: The OBR says that despite all that has been spent to date, there is an as yet unfunded need for another £10 billion a year to cover:
- NHS programmes such as test and trace, revaccinations and the backlog of 3.5 million elective treatments;
- catch-up schooling for pupils; and
- the holes in the fareboxes” of the railways and Transport for London created by the collapse in passenger numbers.
- Climate change: While the government has said much about climate change, the OBR highlights one elephant in the room that would frighten any politician: the loss of revenue from fuel and excise duties in an all-electric world. The OBR says these are worth about 1.5% of Gross Domestic Product (GDP) – £33 billion. In the short term, some of the lost income may be replaced by carbon taxes, but in the long term the hole will have to be filled.
- Government debt: Government debt is currently just about equal to one year’s output of the UK economy, against 40% in 1980. However, at present, the net interest the government pays on that debt is less than a quarter of the 1980 bill (as a proportion of GDP). Ultra-low interest rates are the reason, but the corollary is that even only a small rise in rates would increase that cost significantly.
As we went to press, the Chancellor asked the OBR to work on its next six-monthly report for presentation on 27 October. That might be Budget Day, although many commentators believe Rishi Sunak will wait until spring, ditching the Autumn Budget once again. Whether or not that happens, the OBR’s message is that the Chancellor cannot afford any giveaways. You have been warned.
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2nd September 2021