Today, Rishi Sunak had to defend his Budget plans as an independent economic watchdog warned him that he was in for a wild ride trying to reduce the UK’s huge deficit.
Senior figures from OBR warned that the wiggle room – the money Mr Sunak has to cut the deficit in three years while simultaneously reducing the national debt – was the second-lowest ever recorded.
OBR chairman Richard Hughes said that Treasury may have trouble meeting its new deficit targets if interest rates rise and that they would be in for an ‘unpredictable ride’.
They also informed MPs on the Treasury Select Committee that they expect inflation to fall between six months and one year, but that unemployment could keep it higher.
Mr Sunak faced the same MPs this afternoon and acknowledged that hitting the targets in his new fiscal rules would be a challenge but said it is ‘better than a cat in hell’s chance’.
In a two-hour grilling by MPs on the details of the Budget, OBR chairman Richard Hughes suggested the Treasury may struggle to hit its new deficit targets, especially if interest rates rise, and would be in for a ‘wild ride’.
Sunak, who faced the same MPs this afternoon, acknowledged that reaching the targets in his fiscal rules would be difficult but said that it is ‘better then a cat in hell’s chance’.
Mel Stride, Chairman of the Committee, said that OBR charts made Mel Stride’s fiscal headroom look “rather pale” compared to his predecessors.
Mel Stride, Chairman of the Committee, said that OBR charts made Mel Stride’s fiscal headroom look “rather pale” compared to his predecessors.
Mr Stride stated that although the OBR “didn’t say not one cat in hell’s chance” of hitting his targets but it does seem there is a strong risk that they won’t be met.
Sunak admitted that he has’slightly more headroom’ than other previous chancellors, except George Osborne, in his budget 2015.
OBR modelling lowered the likelihood that the targets would be met by the committee to between 55 and 60%, the committee was told.
“Which I probably refer to as better than a cat at hell’s chance but the numbers are still the numbers,” Mr Sunak said.
Hughes had previously told the committee that Hughes was concerned about the future of the Chancellor as the economy recovers after the pandemic.
He said that the Chancellor had created new fiscal rules for this budget. These include a reduction in debt as a proportion of GDP (gross domestic products) by 2024/25 as well as balance the current budget.
“He set aside the headroom to reach those targets, which is the second-lowest amount of headroom that any chancellor has ever had when setting fiscal rules.
He said that a 1% interest rate increase could easily wipe out the Chancellor’s headroom.
Sir Charlie Bean, OBR member of the budget responsibility committee, stated that inflation will remain high for six to one year. However, he said that it could continue if supply chains constraints remain and prices go higher.
He said that the inflation rate could rise due to the strength of the labor market. It is expected to be about 4% per year on average, which could lead to interest rates rising.
Former Bank of England deputy explained that there are jobs available, but some workers are taking early retirement. Only half of EU migrants who fled the UK during Covid are likely return.
Sir Charlie stated that the current inflationary pressures were associated with supply bottlenecks and labour shortages… which will largely resolve themselves in the next six months to a year.
It is possible that these bottlenecks will take longer to be resolved domestically and globally. What happens to labour shortages in certain areas will be a key issue.
Hughes stated that the workforce will shrink by approximately 160,000.
He stated, “There is an element loss of migrants who would otherwise come here or stay here to remain in the workforce. This is a minor effect, but it has a significant impact on the labour market.
The economist explained that EU migrants were especially favorable to the UK’s finances because we tend to not pay for their education.
Hughes also stated that the loss in productivity was due to the loss and integration of migrants. However, it was part a larger picture because trade with the EU is still well below pre-Brexit or pandemic levels.
“The biggest loss comes from having a less trade-intensive economic which is less connected with the rest of world. It has consequences on the long-run productivity and the economy as a whole rather than necessarily the individuals who were there or not.”
The MPs also asked him about his Government’s Spending Review, which saw increases across all departments by an average 3%, although some departments will still receive funding below pre-2010 levels.
He stated that the funding for health services is expected to continue growing, with governments eager to support it wherever possible.