Sunak faces ‘wild tour’ to meet goals without reducing debt – OBR
The Chancellor has embarked on a “wild adventure” to reduce his deficit according to the new rules announced in the budget, according to the Government Office for Budgetary Responsibility (OBR).
Officials at the agency have warned that Chancellor Rishi Sunak’s leeway to reduce the deficit over the next three years and reduce the national debt was the second smallest level on record.
They also told members of the Treasury Select Committee that they expected inflation to drop between six months and a year, but said the number of people leaving the workforce could keep it higher.
Economic forecasters said they were also concerned that public transport could face a permanent black hole in its finances without cutbacks in services, as passenger numbers remain below pre-pandemic levels.
In a two-hour discussion by MPs on details of Chancellor Rishi Sunak’s budget, OBR chairman Richard Hughes suggested the Treasury may struggle to meet its new deficit targets, especially if interest rates go up, and he would be in a “wild ride”.
He said: âThe Chancellor has set new fiscal rules in this budget and they must reduce debt as a percentage of GDP (gross domestic product) by 2024/2025 and balance the current budget.
“The room for maneuver he has set aside to achieve these goals is the second weakest room for maneuver a chancellor has when establishing fiscal rules.”
He added: “A mere 1% interest rate hike could easily wipe out the Chancellor’s room for maneuver.”
Sir Charlie Bean, a member of the OBR’s fiscal responsibility committee, said he believed inflation would stay high for six months to a year, but said it could continue if chain constraints supply persisted, with prices rising.
He added that the job market could also push up inflation – estimated at around 4% on average for next year – causing interest rates to rise.
The former Bank of England MP explained that jobs are available but some in the workforce are taking early retirement and only half of EU migrants who left the UK during Covid are likely to return.
Sir Charlie said: âCurrent inflationary pressures are associated with supply bottlenecks, labor shortagesâ¦ largely resolving within the next six months or a year.
âBut these bottlenecks may take longer to resolve globally and nationally. A key issue will be what happens with the pockets of labor shortage. “
Hughes added that the workforce is expected to decline by around 160,000 people.
He said: âThere is an element of loss of migrants who would otherwise have come here or would stay here to stay in the workforce. That’s a minority of the effect on the workforce, but it’s still important. “
The economist explained: “Migrants from the EU were particularly favorable to UK finances in the sense that we tended not to pay for their education.”
Mr Hughes also explained that the loss of migrants has played a role in the decline in productivity, but said it was part of a larger picture when trade with the EU remains well below levels of before Brexit and the pandemic.
âThe biggest loss comes from the fact that we have a less trade intensive economy which is less tied in terms of trade with the rest of the world and this has consequences for the long term productivity of the economy as a whole. , rather than necessarily on the individuals who were here or not.
MPs also asked him about the government’s spending review, which has seen an average 3% increase across all departments – though some departments will still see funding below pre-2010 levels.
He said healthcare funding is expected to continue to rise, with governments keen to supplement the service where possible.
But he warned: âIt remains to be seen what the financial model of public transport is in the long term.
âWe don’t know how far people are going to start going back to work five days a week. The revealed preference seems to suggest that people are going to work from home more. “
He added: “I think the assumptions about when ticket revenues in the transportation system return to pre-pandemic levels need to be constantly reviewed and there may be a permanent hole in the system. rail, the London Underground and local transport systems, which are going to have to be subsidized in perpetuity if they are not going to cut services.