Wednesday was supposed to be Budget day in Britain. By cancelling the event, Sajid Javid risks becoming one of the few chancellors never to experience his moment in the fiscal limelight. But the lack of an official statement does not prevent me from outlining the Budget Mr Javid would have presented to the House of Commons, even after the cabinet secretary blocked publication of an update to the Office for Budget Responsibility’s forecasts.
The health of the global economy is precarious with growth hovering only a little above worldwide recession levels. Unable to divorce itself from wider events, Britain’s outlook has also dimmed. The independent OBR was highly likely to have trimmed UK economic growth forecasts for 2019 and 2020 down towards 1 per cent from 1.2 and 1.4 per cent respectively.
None of these downgrades from the fiscal watchdog would have been large, and the OBR was likely to retain its view of the medium-term performance under Prime Minister Boris Johnson’s Brexit deal. Economic growth would recover to annual rates of around 1.6 per cent, it would have said, reflecting an assumed, but far from certain, pick-up in productivity growth.
This medium-term outlook is, of course, problematic. The UK has been accustomed to annual rates of expansion around 2.5 per cent and the past decade’s weaker performance in living standards has caused much misery.
But the more immediately worrying aspect of the official forecasts would have been at least a doubling of government borrowing compared with the predictions published in March. Instead of expecting a modest deficit of £21bn next financial year, only 0.8 per cent of national income, the OBR would have shown it to be around £55bn, over 2 per cent. The increase would not have reflected changes in the economic conditions but two big decisions. First, an end to wishful thinking about the real cost of student loans, following a review of their accounting by the Office for National Statistics. Second, the government’s choice to add an extra £13.4bn to public spending in 2020-21 in the September spending review.
Together, these decisions would put the deficit on a path to settle at a level of around 3 per cent of national income. Any suggestion that Britain’s public finances were on course for budget balance in the mid-2020s would have disappeared.
Mr Javid’s response would have been to ditch at least two of his fiscal rules — the objective of reaching balance and the mandate to limit the cyclically-adjusted deficit to 2 per cent of national income in 2020-21. Instead, the chancellor would have set a new fiscal framework, allowing the government to borrow more now to invest in infrastructure, justifying the change by pointing at the UK government’s very low cost of borrowing. The challenge would have been to simultaneously borrow and invest more, maintain discipline across government, minimise fiscal risks and ensure the additional investment improved the economic outlook.
There could be no guarantees. Following a decade of over-optimism on the UK’s medium-term potential economic performance, the OBR would almost certainly want to wait for results before assuming the best. It would have been correct in taking this stance.
So that was the 2019 Budget that never was. An economy close to full employment, economic forecasts little changed, public finances looking on shakier ground, the deficit forecast to be stable at around 3 per cent of national income and a government committed to increasing investment.
The chancellor would have lauded the recovery from the financial crisis, saying that with a strong and strengthening economy, now was the time to invest in Britain’s future. Of course, that was exactly the title and theme of Gordon Brown’s 2006 Budget.
We know what happened next.
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November 07, 2019 at 05:57PM
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Sajid Javid and the Budget that never was - Financial Times
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