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The Office for Budget Responsibility (OBR) has credited the Chancellor’s tax cuts and benefit reforms with delivering one of the biggest-ever growth upgrades to Britain’s economy.
Richard Hughes, chairman of the Government’s spending watchdog, said new measures to get more people back into work and to encourage businesses to invest will make a difference to future growth over the five years of the forecast.
He said: “0.3pc doesn’t sound very much but it is one of the biggest growth upgrades we have ever done for policy in our forecasts. That is because it is really hard to accelerate the growth rate of this country.
“You are dealing with a capital stock of £4 trillion and a labour force of 34 million, so £14bn of investment and an extra 100,000 people does make a difference. But it is a few drops in a big ocean and you have got to keep dropping it in if you want to make a difference.”
The OBR expects the economy to grow by 0.6pc this year, rather than shrinking as it had anticipated at the time of the Budget in the spring. It also found GDP rose by 4.3pc last year, which is more than the 4pc it had previously expected.
Mr Hunt had previously cautioned that he could not cut taxes until the cost of living crisis had come back under control.
Although inflation, at 4.6pc, is still more than twice the Bank of England’s target of 2pc, it is significantly lower than its peak of 11.1pc which it hit in October last year.
As a result the Chancellor claimed the economy “has turned a corner”, enabling a degree of tax cuts, relative to previous plans.
Mr Hughes said the tax cuts should not stoke significant inflation, coming at a time when frozen income tax thresholds are still taking acting as an extra levy on household incomes.
The package will add just “0.1pc on the price level in five years’ time,” he said. This is because the Government is effectively returning some of the surprise extra tax revenues it is receiving from higher inflation, rather than borrowing more to cut taxes.
“Borrowing is unchanged,” said Mr Hughes. “Higher inflation is bringing in more tax revenue, and the Chancellor has decided to give that back to taxpayers in the form of lower rates.”
The Chancellor’s plans to get more people back to work include more funding for treatment and support finding work, but also the possibility of losing benefits if claimants fail to prove they are looking for work for six months.
Along with policies announced earlier in the year, the OBR estimates the reforms will boost bring 200,000 people into the workforce.
The OBR has in the past been criticised for being too gloomy, particularly on growth-boosting measures, but Mr Hughes said the organisation seeks to be even-handed when assessing policies.
He said: “What we also try to do in putting them together and talking to the Chancellor is to give him credit where his policies do boost the growth potential of the economy.”
Sir Jacob Rees-Mogg, the former business secretary, said the acknowledgement of the boost to growth is “a welcome step in the right direction”, but added: “I remain concerned about the damaging effect the OBR’s previous errors have had on economic policymaking.”
Julian Jessop, fellow at the Institute of Economic Affairs, said the OBR “has always tried to model the beneficial impact of tax cuts, so it is unfair to say they do not do it at all. But the point is, they don’t do it enough”.
Those rules are set by the Government, then scored by the OBR as it calculates the likely path of economic growth, government borrowing and the national debt.
Mr Hughes’ upgrade came as data indicated economic growth is stabilising.
Private sector activity held firm in November, according to the purchasing managers’ index, an influential survey of businesses from S&P Global.
It marks an end to three months of contraction, and raises hopes the UK will avoid a more sustained slump.
The improvement was led by the dominant services industry, which recorded modest growth, while manufacturers are still struggling.
Tim Moore, economics director at S&P Global Market Intelligence, said it indicates “the UK economy found its feet again in November”.
He added: “Relief at the pause in interest rate hikes and a clear slowdown in headline measures of inflation are helping to support business activity.”
Has the OBR reasserted its power over Britain’s finances?
One might not expect the life of a bean counter to be full of high political drama, but that is where Richard Hughes has found himself of late.
Since being appointed chairman of the Office for Budget Responsibility three years ago, Hughes has been at the centre of every storm around tax and spending, whether that be last year’s pensions crisis or the collapse of Liz Truss’s government.
The importance of Hughes’ role was evident during the Spring Budget when his sums declared that Jeremy Hunt had the smallest room for financial manoeuvre on record.
It placed severe limits on what the Chancellor could do with the public purse and tied his hands amid the cost of living crisis.
This time around the Chancellor was much less constrained by the OBR’s economic and financial forecasts.
The watchdog said he had far more cash to spend at the Autumn Statement than previously thought, in large part due to the sustained level of inflation which raked in more tax receipts for the Exchequer.
Hunt made good use of that extra headroom on Wednesday as he rolled out a larger-than-expected package of tax cuts.
The measures reminded cynics of the changeability of OBR forecasts, as the body once again was able to reassert its importance over government tax and spending.
However, fans of the watchdog will cheer Hughes’ declaration that the policy package offers the biggest boost to growth so far recorded by the OBR.
Very small changes to its projections of the future size of the economy can have significant effects on forecasts for the precise size of the £2.6 trillion national debt, which determines whether the Chancellor will hit or miss his targets.
That in turn influences spending and tax decisions.
Admittedly, the OBR is at pains to highlight uncertainty around its figures and regularly publishes detailed self-criticism.
In this week’s forecasts, it set out “fan charts” showing the huge range of future possibilities that could occur.
Although the central forecast predicts the economy will grow by 1.7pc in 2028, the fan chart shows this could rise to 5pc - or even shrink by more than 2pc.
This has a knock-on effect for other measures, including national debt which could fall as low as 68pc of GDP, or rise to 126pc.
Despite this uncertainty, Hunt has relied on the OBR as a precise guide.
James Smith, economist at the Resolution Foundation, says the net effect of inflation boosting tax receipts and government spending will give the Chancellor a cumulative £90bn boost over the next five years.
“He has basically spent all of that in terms of a big tax giveaway,” he says, putting the size of the tax cut at 96pc of extra wriggle room.
In one sense, this makes perfect sense. After all, Hunt sets the fiscal targets and appoints the OBR to measure his performance against those goals.
On the other hand, critics of this setup argue it hands too much responsibility to unelected officials.
Julian Jessop, fellow at the Institute of Economic Affairs, says the forecasts are “as good as they can be” but that “the problem is we put too much weight on them” when making decisions on tax and spending.
In particular, he worries that the nature of the five-year targets means policies that take many years to boost the economy are rarely considered.
Jacob Rees Mogg, the former business secretary, says the forecasts’ reflection of growth-boosting tax cuts is “a welcome step in the right direction”.
However, he “remains concerned about the damaging effect the OBR’s previous errors have had on economic policymaking”.
Although recent history has been one of constraint, as noted by Carl Emmerson at the Institute for Fiscal Studies, who says the OBR has traditionally overstated headroom figures.
“It’s certainly true that for all the criticism it gets, over the period since 2010, the OBR has tended to be too optimistic,” he says.
A senior government source professes to be “a fan of the role of the OBR” but says it “runs a huge risk of becoming stale and set in their ways”.
“The OBR, MPC and any other forecaster or regulator should spend a lot of effort on blue-sky thinking about the scenarios - their analysis becomes quickly predictable and they can miss big changes, like inflation, supply chain impacts and wars,” says the source.
Regardless, the OBR bean counters may have allowed the Chancellor to loosen purse strings this week but that does not mean they have lost any of their power over the nation.