The Chancellor has set himself three debt and borrowing objectives. The first (the ‘fiscal mandate’) is to reduce public borrowing to no more than 2% of national income in 2020/21. The second (the ‘fiscal objective’) is to eliminate borrowing altogether by the mid-2020s. The third (the ‘supplementary target’) is for net debt to fall as a share of national income in 2020/21.
The first and third of these are on course to be met. The last official forecasts from the Office for Budget Responsibility (OBR), published in March, suggested that borrowing would fall to 1.3% of GDP by 2020/21, giving £15 billion of headroom against the fiscal mandate in today’s terms. Public sector net debt was also projected to fall from 85.1% of GDP to 82.1% between 2019/20 and 2020/21; this has been helped by the unwinding of a Bank of England scheme introduced after the Brexit referendum, which provided a temporary cheap line of credit to banks.
New commitments made by the Government since March – including higher spending on the NHS and a further freeze in fuel duty rates – have reduced this headroom, adding billions of pounds to annual borrowing. Theresa May’s promise earlier this month to end austerity also increases pressure for more public spending, since the last OBR forecasts for borrowing were predicated on the Government making further cuts to welfare benefits and further real-terms cuts to day-to-day spending on public services.
But there is growing evidence that the Chancellor could be handed an unexpected fiscal windfall next week, which could restore some of his room for manoeuvre. Borrowing last year has turned out to be lower than the OBR thought in March. This year tax revenues (particularly from corporation tax) have grown more strongly than they predicted seven months ago. As a result, the Financial Times has estimated that the new OBR forecast could revise borrowing down by about £13 billion a year.
This change to the forecasts will make it easier for the Chancellor to muddle through this Budget. He may be able to pen the Government’s new firm spending and tax cutting commitments into the books, without either needing to relax his short-term borrowing and debt constraints or announce significant tax increases. He might even be able to loosen the spending envelope in the near term for public services outside the NHS; this could help prevent a worsening of some of the pressures being felt across services from prisons to adult social care, which the IfG and CIPFA’s Performance Tracker has highlighted.
But 2020/21 – when his fiscal mandate and supplementary target run out – is not far away. The remaining rule – to eliminate public borrowing altogether by the mid-2020s – is ill-defined. Even so, the OBR’s projections for longer-term public spending needs and tax revenues suggest current government policies are not consistent with achieving this objective. Indeed, the OBR’s projections suggest public borrowing is likely to start rising again unless the Government scales back the scope or quality of public services and welfare or announces new tax rises.
If the Chancellor is serious about eliminating public borrowing, it is likely to require a combination of tax increases and further reductions in the scope or quality of public services and welfare. These are political choices and ones that the Government must start making clear to the public.
Ongoing Brexit negotiations mean there is an unusually large degree of uncertainty about the UK’s economic and fiscal outlook and what public spending needs will be. Nonetheless, the Chancellor should use the Budget to lay out more clearly his fiscal ambitions, which will guide the choices the Government will make about tax and spending. Doing so will provide the basis for a more serious public conversation about the trade-off facing the nation between the scope and quality of public services and welfare on the one hand, and the level of taxes on the other.