UK ‘fiscally offside’ by up to £60bn, Citi fears; house prices rise again – as it happened

Time to wrap up.

Economist have warned that the UK’s pre-election budget, delivered yesterday, is based on ‘Fiscal fiction’, rather than plausible plans and assumptions.

Citigroup warned that the chancellor’s spending plans as “fiscally offside” by £50-60bn, as they are based on unlikely productivity growth, and implausible spending cuts.

The Institute for Fiscal Studies accused both the government and the opposition of a conspiracy of silence about what is actually ahead, with its director Paul Johnson saying:

They, and we, could be in for a rude awakening when those choices become unavoidable.

The IMF predicts that stabilising the UK’s debt is likely to require additional tax rises.

While the Resolution Foundation showed that this will be the first parliament in modern history to see a fall in living standards.

Here are today’s stories on the aftermath of the budget:

Plus in other news, we’ve seen a jump in UK house prices, and takeover drama in the banking sector:

At the end of January, the International Monetary Fund warned Jeremy Hunt not to make tax cuts in the budget.

He wasn’t persuaded, though.

And today, the IMF has waned that stabilising the UK’s debt is likely to require additional tax rises.

Speaking at the IMF’s regular press briefing on Thursday, director of communications Julie Kozak told reporters:

“IMF staff will be analysing the announced policies in greater detail but the aim to continue the fiscal consolidation pursued since 2022 to reduce inflation and stabilise debt is welcome.”

She added that the national insurance cut and reform of the child benefit system had been funded by “well-conceived revenue-raising measures”.

Kozak said:

“Significant spending to protect service delivery, growth-enhancing investment and the appropriate commitment to stabilise debt are likely to require additional revenue-raising measures in the medium term.”

Citigroup fears that the UK is actually up to £60bn away from meeting Jeremy Hunt’s fiscal mandate.

Ben Nabarro, chief UK economist at Citigroup, warns in a research note today that the Office for Budget Responsibility is being too optimistic when it assumes UK productivity will grow at 0.9%.

Citi predicts productivity growth will be just under 0.5%, as it has been since the financial crisis.

Nabarro writes:

This in part reflects supply shocks that we think are likely to intensify in the years ahead. But the implication is that the fiscal forecasts are probably around £30-35bn worse than today’s OBR estimates imply.

He also predict that the real terms cuts penciled into the current spending profile are undeliverable, so a further £20-25bn in spending is also ultimately likely.

We therefore continue to see the UK as fiscally offside by around £50-£60bn.

But, that margin could fall to £15-£20bn “if rates rally as we currently expect”, Nabarro adds.

The OBR yesterday showed that Hunt has just £8.9bn of headroom to show debt falling, as a share of GDP, in 2028-29 – a very low amount in historic terms, as Resolution Foundation showed this morning (9.29am).

That, though, was dependent on fuel duty no longer being frozen, and on painful cuts to public spending after the election – which the IFS says would require “staggeringly hard choices” (see 10.41am).

Nabarro warns that the UK’s post-Covid fiscal headwinds are only just beginning, and cites three reasons to be worried:

First, much of the pain associated with the withdrawal of both Covid and energy support we think has yet to come – with the former effect in particular elongated by contemporaneous restrictions and alike. Alongside lagging multipliers, the removal of Covid-era support exerts a materially larger headwind to growth over the years ahead.

Second, the UK also faces the fiscal adjustment associated with higher rates, which means a tighter primary balance than in the years before the pandemic.

And third, in the years ahead, we think fiscal policy is itself also likely to have to adjust to a more disrupted, volatile world. The implication is fiscal policy is also likely to need to be tighter in ‘normal times.’ With the OBR estimating the government currently has only a 54% change of meeting even the loosest definition of fiscal sustainability. That is not good enough.

Newsflash: The European Central Bank has left its key interest rates on hold, but slashed its inflation forecasts – which could mean borrowing costs are cut soon.

After its latest policy meeting, the ECB has left the three key ECB interest rates unchanged.

This means its benchmark deposit rate (paid on commercial bank deposits) remains at an all-time high of 4%, while its main refinancing operations will operate at 4.5% and its marginal lending facility (overnight loans to banks) sticks at 4.75%.

The ECB’s latest staff projections show that inflation has been revised down, in particular for 2024 due to cheaper energy prices

Staff now project inflation to average 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026.

Back in December, the ECB expected inflation would average 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026.

The projections for core inflation (excluding energy and food) have also been revised down today; they now average 2.6% for 2024, 2.1% for 2025 and 2.0% for 2026.

The IFS’s Paul Johnson then accuses the government and the opposition of joining in “a conspiracy of silence” in not acknowledging the scale of the choices and trade-offs that will face the country after the election.

They, and we, could be in for a rude awakening when those choices become unavoidable, he fears.

On the politics of the budget, Johnson points out that the non dom changes and the extension of the energy profits levy announced by Jeremy Hunt were Labour policies.

In the “through-the-looking-glass” world of pre-election argy-bargy this will appear to make Labour’s job more difficult. They want to earmark the extra revenue from these taxes to fund some of their spending plans.

A moment’s thought should show this for the nonsense that it is, at least in the real world of fiscal constraints and trade-offs, if not in the rhetorical world of electoral politics.

First, the numbers involved are trivially small by comparison with the fiscal challenges. Three or four billion of revenues a year don’t even count as a drop in the fiscal ocean when it comes to the scale of the challenges facing us. And second, the fact that the changes have been announced doesn’t mean the revenue disappears. It’s still there, indeed more definitely so.

By accepting the NI cut, the opposition does make life more difficult for itself. That is £10 billion a year they have lost. The opposition have been just as shy as the chancellor about telling us what they actually intend to do on taxes and spending after the election.

If I am sceptical about Mr Hunt’s ability to stick to his current spending plans, I am at least that sceptical that Rachel Reeves will preside over deep cuts in public service spending.

The IFS fear that the next parliament could well prove to be the most difficult of any in 80 years for a chancellor wanting to bring debt down.

Paul Johnson says:

Even stabilising debt as a fraction of national income is likely to mean some eye wateringly tough choices – and we are talking tens of billions of pounds worth of tough choices – on tax and spending.

Johnson points out that the goal of getting debt falling, as a share of GDP, just in five years time is based on a whole series of unlikely, or undesirable things.

Perhaps the unlikeliest is that the government will stop freezing fuel duty.

And the least desirable perhaps is that investment spending will fall by £18bn a year in real terms.

There’s also the prospect of £20bn of cuts to day-to-day spending on a range of public services outside of health, defence and education.

That, Johnson says, will require some staggeringly hard choices which the government has not been willing to lay out.

He says:

Indeed, we heard yesterday that the next spending review, in which these choices will have to be announced, will rather conveniently not happen until after the election.

One only has to look at the scale of NHS waiting lists, the number of local authorities at or near bankruptcy, the backlogs in the justice system, the long-term cuts to university funding, the struggles of the social care system, to wonder where these cuts will really, credibly come from.

You can watch the IFS’s presentation here:

The Institute for Fiscal Studies’s analysis of the budget is just out.

And IFS director Paul Johnson says that nothing has changed very significantly following what Jeremy Hunt did yesterday, and what the OBR said.

That means we are:

• heading for a parliament in which people will on average be worse off at the end than at the start,

• looking at a debt to GDP ratio that is at its highest level in 70 years and is showing no signs of falling;

• facing debt interest payments at close to all time highs;

• seeing worrying increases in the number of individuals moving onto health and disability related benefits, bringing huge challenges for those households and rising costs for the public purse;

• (despite the genuinely significant cuts in NICs) stuck with a situation where tax revenues will have risen by a record amount as a share of national income over this parliament and still heading towards UK record levels;

• implicitly planning on big cuts in public investment spending overall and cuts to many areas of day-to-day spending on public services despite very obvious signs of strain in many areas.

In happier news, British businesses’ expectations for inflation over the coming years have dropped.

A survey from the Bank of England has found that firms expect to curb their price rises over the next year,with output price inflation expected to decline by 1.1 percentage points over the next 12 months.

Companies also expect inflation to fall, but remain over the UK’s target. One-year ahead CPI inflation expectations have declined further to 3.3% in February, down from 3.4% in January.

Happily for workers (if not the Bank), firms expect to pay inflation-beating pay rises.

Expected year-ahead wage growth remained unchanged at 5.2% on a three-month-moving-average basis, the BoE says, while annual wage growth was 6.7% in the three months to February.

Resolution Foundation also show the stark impact of the UK’s economic stagnation on living standards.

It will still take until 2026 for real wages to return to their 2008 level, their analysis shows – had real wages kept growing at their prefinancial crisis pace, the average worker in 2023 would have been around £14,000 better off

And, if the election is held at the end of this year, the period since 2010 will have seen GDP per capita grow by 0.8 per cent per year, and average wages by just 0.2 per cent per year in real terms.

On both measures, this would be the slowest growth of any party’s period in office since the Second World War: