The chancellor will raise government borrowing to help fund a 2p cut in national insurance contributions from April, according to an assessment of the spring budget by the Treasury’s independent forecaster.
The Office for Budget Responsibility said the chief measures to pay for Jeremy Hunt’s budget measures, including the cut in national insurance and a reduction in capital gains tax, would come from an average extra £8bn of borrowing in each of the years to 2028-29.
Under a third of Hunt’s cumulative tax cuts over the next five years are funded by stealth tax rises, and the rest by extra borrowing, analysts at the Resolution Foundation said.
“The chancellor has delivered a second dollop of pre-election tax cuts, borrowing more and taxing the likes of non-doms, vapes and energy companies to do so,” said Torsten Bell, the chief executive of the thinktank.
The Resolution Foundation added that the chancellor was also relying on steep cuts across many Whitehall departments and tax rises in several years’ time that were unlikely to take place to pay for the tax cuts that will take effect next month.
Paul Johnson, the director of the Institute for Fiscal Studies, said Hunt was expecting the public to believe “a pie-in-the-sky promise to increase fuel duties – this time we mean it, promise! – and a set of post-election spending plans that still imply substantial cuts to funding of many public services, which are clearly struggling with their current level of funding”.
The OBR said the chancellor was able to increase borrowing after a £13bn average gain from lower debt interest costs.
A crackdown on tax avoidance will also be attempted to help balance the books after Hunt said HMRC would gather a further £4.5bn over the five years in taxes that would otherwise go unpaid.
OBR forecasts showed that underlying debt, which excludes Bank of England borrowing, will be 91.7% of GDP in 2024-25, rising to 93.2% in 2026-27 before falling to 92.9% in 2028-29.
Hunt said: “Our underlying debt is therefore on track to fall as a share of GDP, meeting our fiscal rule. We continue to have the second lowest level of government debt in the G7, lower than Japan, France or the US.”
Inflation was expected to fall below the Bank of England’s 2% target within the next few months – from 4% now – reversing a 1% fall in inflation-adjusted household incomes last year to a 1% increase this year, the OBR said. House prices were expected to begin climbing again in 2024 after a year of stagnation, and the national insurance tax cut would encourage the equivalent of almost 200,000 people back into the workforce.
Richard Hughes, the chair of the OBR, said the government’s financial position remained challenging due to high debt, subdued economic growth and the highest interest rates for over a decade.
The OBR’s updated forecasts suggested the UK economy would grow slightly faster than expected this year and next, compared with November’s forecasts.
After entering recession at the end of 2023, the economy is expected to grow by 0.8% this year and 1.9% in 2025. That is slightly stronger than the 0.7% and 1.4% growth rate expected by the OBR in November. Growth is then forecast to be 2% in 2026 before dipping to 1.8% and 1.7% in 2027 and 2028.
Stephen Millard, deputy director of the National Institute for Economic and Social Research (NIESR), said the forecasts for GDP were optimistic and flattered the UK’s prospects.
“The OBR expects growth of 1.9% next year and this helps to bring down the deficit and debt-to-GDP ratios,” he said. “However, NIESR expects something nearer 1%, meaning that the chancellor’s forecasts for the debt and deficit to GDP ratios will likely prove to be overoptimistic.”
Douglas McWilliams, co-chair of the Growth Commission, a right-of-centre thinktank, said the OBR’s figures showed that the chancellor’s plans were given a lift by higher migration, which gave a boost to GDP but reduced GDP per capita.
“If you listened to the chancellor, you might have thought that the budget was for more growth, less migration, more people working and lower taxes. But the OBR spills the beans – slower growth in GDP per capita, more migration, lower participation rates and higher, not lower, taxes,” he said.
