MNI INTERVIEW: UK Fiscal Giveaway Won't Stop Consumer Squeeze

The fiscal giveaway in the UK’s March 23 mini-budget will only partially offset the squeeze from higher energy and food prices on consumers and will not be a game changer for the economic outlook, the deputy chief economist at the Institute for Government told MNI.

The fiscal rule requiring the government to balance the current budget in three years will constrain any action by Chancellor of the Exchequer Rishi Sunak in his Spring Statement despite a forecast improvement in public finances, Thomas Pope said in an interview. Likely to be capped at around 0.5%-0.75% of gross domestic product, any giveaway will not come close to offsetting the anticipated decline in real household income, he said.

The best the Chancellor could “hope to do is mitigate the effect for some of the worst affected households .. [but they] are still going to feel the pinch,” Pope said.

“If real wages are falling by as much as the Bank of England thinks they are going to, then it is very hard for a government to fully protect against something like that, and I don’t think the government will want to do that,” he said.

DECLINING REAL INCOME

The Bank of England in February forecast real labour income would decline by 2% this year and the Resolution Foundation has suggested it could be double that.

Official forecasts from the Office for Budget Responsibility at the time of the Treasury’s October budget gave Sunak GBP25.1 billion headroom against his fiscal rule for current revenue to match current spending three years ahead. Since then he has announced a GBP9 billion giveaway to cushion the hit from rising energy bills.

While the BOE has since downgraded real growth forecasts, Pope pointed out that nominal GDP, crucial as departmental spending is set in cash terms, will be driven higher by the surge in inflation. That, plus better-than-expected public finances so far this fiscal year, will give Sunak some room.

“There is definitely scope for the Chancellor to do something if he wants to in the short term and the medium term,” said Pope, though he cautioned that room for manoeuvre would be constrained by Sunak’s desire to keep resources in reserve amid a volatile economic backdrop.

“His argument in October was ‘I need headroom against my rule because things are uncertain’, well things are probably more uncertain now than back in October, so I suspect that argument is going to come out again,” Pope said.

UPRATING BENEFITS ONE POSSIBILITY

One plausible option would be to uprate benefits in line with anticipated inflation at the start of the next fiscal year in April. The Bank now expects this to be around 8%, rather than the 3% anticipated in September, the usual reference month for benefit changes.

Pope said that this would cushion the hit for the least well-off and that he would be surprised if Sunak did much more, although Chancellors are tempted to deliver surprise measures to grab headlines. He does not expect Sunak to delay or cancel the planned increase in National Insurance Contributions, a payroll tax.

Having had to fight a political battle over that increase “If you delay it now it would be very hard to (reintroduce) … so I would be very surprised if he did that,” Pope said.