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Jeremy Hunt has left himself only a “tiny” margin for error against the UK government’s debt-reduction rules, the public finance watchdog warned, firing a warning shot as the chancellor plots fresh tax cuts.
Richard Hughes, chair of the Office for Budget Responsibility, said the £13bn budget headroom forecast in November was heavily exposed to changing assumptions on interest rates as well as data revisions.
The headroom figure is a measure of how much budgetary margin Hunt has to meet his self-imposed target of reducing the ratio of government debt to GDP in five years’ time.
The OBR has yet to deliver its new forecast of how large the headroom will be in the upcoming Budget on March 6. The figure will act as a crucial determinant of the chancellor’s scope to cut taxes or increase spending.
But Hughes on Tuesday called November’s estimate “a tiny number compared to the risks you face”. He added that UK governments in general ran things “very close to the wire” when it came to fiscal rules.
Hunt and Prime Minister Rishi Sunak have stoked up expectations that the Budget in March will contain a fresh round of tax giveaways as the Tories try to boost their dire polling figures ahead of the general election.
The chancellor enacted £20bn of personal and business tax cuts in last November’s Autumn Statement. The measures assumed sharp real terms cuts to some departments’ spending after the election expected this year.
Hunt last week at the annual World Economic Forum conference in Davos, Switzerland, hinted heavily that more tax cuts are on the way.
The chancellor said he did not yet have the OBR forecasts that would frame his Budget, but added that tax cuts would be “very pro-growth” and would be coupled with a falling debt trajectory.
Hughes told the House of Lords economic affairs committee that given the debt rule was assessed on a rolling five-year forecast horizon, it was not working to ensure that the public debt-to-GDP ratio was actually falling.
“As soon as you get an extra year to meet it the chancellor fully takes advantage of that,” he said, calling it a “mañana rule”.
This comes at a time when the UK faces growing long-term fiscal pressures in the coming decades because of forces such as population ageing, which will drive up health spending, he added.
Hughes told the Lords that policymaking would be improved if chancellors gave themselves a margin for error of more than just a few billion pounds when it comes to meeting their debt rules.
The projected headroom “is very small relative to the forecast errors inherent in any forecasting process, including ours”, he said.
Official figures on Tuesday showed public borrowing fell to a lower-than-expected £7.8bn in December. The data added to expectations that Hunt will try to use fiscal giveaways to reduce the opposition Labour party’s consistent opinion poll lead.
Tom Josephs, an OBR committee member, warned the Lords against reading too much into the monthly public finance numbers, which showed lower-than-expected debt interest payments.
He said they could be volatile and that they did not show how the public finances will fare over the medium term.
An ally of Hunt said: “We’ve managed to start cutting taxes in a way that is affordable, responsible and doesn’t compromise our commitment to reduce debt. That will continue.”
Hunt expects Labour to accuse him after the Budget of irresponsibly using his fiscal headroom for tax cuts and of adopting a “scorched early policy” on the public finances, according to the chancellor’s colleagues.
They argued that Labour would do so to justify dropping its commitment to spend £28bn a year by the end of the parliament on green capital investments.
Labour has confirmed it will re-examine the £28bn plan after Hunt’s Budget to assess the state of the public finances.
The Treasury said: “While we have doubled our headroom since March, from £6.5 billion to £13 billion, it remains low by historical standards and can be wiped out by changing economic conditions.”
It added: “That’s why we must stick to our plan to reduce debt by growing the economy and being responsible with spending.”
