On the eve of World Book Day, it is perhaps fitting that Britain’s Chancellor Jeremy Hunt was forced into writing a bit of fiscal fiction. Caught between political pressures to boost his party’s popularity and the country’s fragile public finances, he managed to confect a spring Budget that cuts taxes, meets his fiscal rule and makes a start on some sensible reforms. The problem is that he has had to stretch economic reality in order to get there.
The chancellor’s headline measure — and intended vote-grabber — was a 2 percentage point cut to national insurance, at a cost of ￡10bn per year. Beside a few small tax rises elsewhere, the giveaway is funded in part by higher borrowing. But to make the numbers add up Hunt is also relying on unrealistic spending plans, which could involve unspecified future cuts to already strained public services.
His plans leave the country with a historically tiny ￡8.9bn of “headroom” against the chancellor’s rule to have debt as a share of the economy falling within five years, according to the Office for Budget Responsibility. That figure is highly sensitive to changes in growth, inflation and interest rate forecasts. It also relies on future revenues from annual fuel duty rises that the Conservatives have perpetually cancelled. It is likely that some of Hunt’s measures will need to be reversed by the next government.