Jeremy Hunt’s near-impossible claims and the OBR

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Good morning. The Red Queen believed “as many as six impossible things before breakfast”, while Jeremy Hunt’s Budget tomorrow will rest on two near-impossible things. Some thoughts on what those two things are and what they say about one of the UK’s fiscal watchdogs below.

Tomorrow we’ll have a bonus Inside Politics edition in the afternoon to digest the goods.

Time to pretend

The Conservative party has changed an awful lot in terms of its key personnel, its policies and approach since it came into office back in 2010. But here is one thing that has persisted: successive Tory chancellors have used the promise of increasing fuel duty in line with inflation to make their forecasts add up in one fiscal event, only to once again freeze fuel duty in the next. As a result, there hasn’t been an increase in fuel duty in cash terms since January 1 2011.

There is a good political reason for this: you can’t win power without the votes of motorists, and as such, every Conservative chancellor has decided, I think correctly, that there is no path to Tory victory without freezing fuel duty. As George Parker and Sam Fleming reveal, Jeremy Hunt is not going to become the first Conservative to change that approach.

Whether you think the government will ever actually increase fuel duty again, however, is a political judgment, not an economic one, which is why the Office for Budget Responsibility has to include it in their forecasts. They can, however, also produce increasingly passive-aggressive charts, such as my favourite from last year’s Budget:

Closely linked to successive Conservative governments’ inability to increase fuel duty has been the inability of successive Tory governments since 2016 to continue reducing public spending at anything like the scope or speed David Cameron managed from 2010 to 2016. (Here’s another one of my favourite FT charts.)

That the OBR cannot consider either our chart or its own in assessing government spending decisions gives Hunt more wriggle room to say he is meeting his own fiscal rule, which requires the ratio of public debt to gross domestic product to be falling in five years’ time. This is because he can pretend that he will increase fuel duty and cut public spending in future budgets. Indeed, as George and Sam report, he may lean further on the latter option to create “headroom” for further tax cuts:

According to Treasury insiders, the chancellor could save £5bn by cutting plans to increase departmental spending by 1 per cent a year in real terms after 2025, reducing the pencilled-in rise to 0.75 per cent. 

I mean, why stop there? Why not reduce the rise to 0.25 per cent and save £15bn? Go the whole hog and don’t increase it at all in real terms, save £20bn!

There’s a really good argument to be made here that these fictions traduce the purpose of the OBR and that its remit should be amended to allow officials to make judgments about whether fuel duty will ever be increased, or to include greater scepticism about spending cuts in their forecasts.

But it won’t ever happen, because Hunt’s other ally in this is the Labour party. Keir Starmer’s team don’t want to fight the next election having to field questions about their tax rises and so it is in their short-term interests to talk as if Hunt’s spending plans can be implemented, rather than pointing out there is about as much chance of Hunt delivering his spending plans as there is of him raising fuel duty this close to an election, or indeed ever.

As such, while an important policy story of this week’s Budget will be some of the eyebrow-raising claims in it, the things that allow Hunt to make those pledges will remain in place: whoever the next chancellor of the exchequer ends up being.

Now try this

At the moment, I am playing a lot of Final Fantasy 7: Rebirth, the second part of Square Enix’s remake of the 1997 original. It is very enjoyable in a nostalgic way, but anyone coming to it fresh is better served by getting the original game. (I recommend the Switch.)

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