Sunak faces ‘wild ride’ to hit targets on reducing debt – OBR

The OBR told MPs high inflation is expected for the next six months to a year and warned over the jobs market.

Simon Neville
Monday 01 November 2021 16:37
Chancellor will struggle to hit budget deficit targets, OBR warns. (Dan Kitwood / PA)
Chancellor will struggle to hit budget deficit targets, OBR warns. (Dan Kitwood / PA)

The Chancellor is set for a “wild ride” in order to reduce his deficit under new rules announced at the budget, according to the Government’s Office for Budget Responsibility (OBR).

Officials from the body warned that the amount of wiggle room for Chancellor Rishi Sunak to cut the deficit in the next three years and reduce national debt was the second-smallest level on record.

They also told MPs on the Treasury Select Committee they expect inflation to fall in between six months and a year but said the number of people leaving the workforce could keep it higher.

Richard Hughes, OBR Chairman, appearing before MPs of the Treasury Select Committee. (Parliament TV / PA)

The economic forecasters said they also feared public transport may face a permanent black hole in its finances without service cuts as passenger numbers remain below pre-pandemic levels.

In a two-hour grilling by MPs on the details of Chancellor Rishi Sunak’s budget, OBR chairman Richard Hughes suggested the Treasury may struggle to hit its new deficit targets, especially if interest rates rise, and would be in for a “wild ride”.

He said: “The Chancellor set himself some new fiscal rules in this budget and they are to get debt falling as a share of GDP (gross domestic product) by 2024/25 and balance the current budget.

“The headroom he set aside to reach those targets is the second-lowest headroom that any chancellor has had when setting fiscal rules.”

He added: “Just a 1% interest rate rise could easily wipe out the Chancellor’s headroom.”

Mr Sunak later acknowledged that hitting the targets in his new fiscal rules would be a challenge, but said it is “better than a cat in hell’s chance”.

Commons Treasury Committee chair Mel Stride said the Office for Budget Responsibility charts put Mr Sunak’s fiscal headroom looking “rather pale by comparison” to his predecessors.

Mr Stride said that while the OBR “didn’t say not a cat in hell’s chance” of hitting his targets, it does appear there is a “strong risk those targets will not be met”.

Mr Sunak acknowledged he has “slightly less headroom” than typical previous chancellors, other than George Osborne in his 2015 budget.

The committee heard OBR modelling put the likelihood of meeting the targets as being 55-60%.

“Which I probably describe as better than a cat in hell’s chance, but the numbers are the numbers,” Mr Sunak added.

Sir Charlie Bean, budget responsibility committee member at the OBR, said he believed inflation will remain high for between six months and a year, but said it could continue if supply chain constraints remain, with prices going higher.

Sir Charlie Bean of the OBR said he expects inflation to remain high for between six months and a year. (Parliament TV / PA)

He added that the jobs market could also push inflation up – estimated to be around 4% on average for the next year – leading to interest rate rises.

The former Bank of England deputy explained that jobs are available but some in the workforce are taking early retirement and only half of EU migrants who left the UK during Covid are likely to return.

Sir Charlie said: “The current inflationary pressures are associated with supply bottlenecks, labour shortages… largely sorting themselves out in the next six months or a year.

“But it is possible that it may take longer for those bottlenecks to resolve themselves globally and domestically. A key issue will be what happens with pockets of labour shortages.”

Mr Hughes added the workforce is expected to shrink by around 160,000.

He said: “There is an element of loss of migrants who would have otherwise come here or stayed here to stay in the workforce. That is a minority of the effect on the labour force but it is nonetheless a significant one.”

The economist explained: “EU migrants were particularly favourable to the UK finances in the sense that we tended to not pay for their education.”

Mr Hughes also explained that the loss of migrants played a part in productivity falling, but said it was part of a larger picture when trade with the EU remains well below pre-Brexit and pandemic levels.

“The bigger loss comes from the fact that we have a less trade-intensive economy which is less connected in terms of trade with the rest of the world and it has consequences for the long-run productivity of the economy as a whole, rather than necessarily the individuals who were either here or not.”

MPs also asked him about the Government’s spending review, which saw rises across all departments by an average of 3% – although some departments will still see funding below pre-2010 levels.

He said health funding is likely to continue rising, with governments keen to top up the service wherever possible.

But he warned: “It remains to be seen what the financial model for public transport is in the long term.

“We don’t know to what extent people are going to start returning to work five days a week. Revealed preference seems to suggest people are going to work from home more.”

He added: “Assumptions about when ticket revenues into the transport system recover to pre-pandemic levels I think have to be kept under constant review and it may be the case there is a permanent hole in the rail system, the Underground in London and local transport systems, which are going to have to be subsidised in perpetuity if they’re not going to cut services.”

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