Measures to boost business investment and the supply side of the economy are encouraging, but the economic and fiscal outlook remains very challenging
The OBR’s forecasts for government borrowing – before any new policy measures – improved significantly since its projections at the time of the March Budget. This gave the government room to implement some notable fiscal easing measures, including the cut in the rate of national insurance and the permanent extension of the full-expensing capital allowance scheme for business investment, while still ensuring that its primary fiscal target was met (that public sector net debt excluding the Bank of England is falling in the final year of the forecast).
Despite the high-profile tax reductions, the OBR forecasts that the overall tax burden will continue to rise in each of the next five years, reaching a post-war high of almost 38% (see chart).
Despite the better-than-expected news on borrowing, the medium and long-term fiscal backdrop remains very challenging. This is at a time when population ageing will increasingly weigh on the public finances, and when more money will also likely be needed to fund increased defence spending and the Green Transition.
Public sector net debt as a share of GDP (excluding the Bank of England) will rise above 90% in the next fiscal year, and only begins to modestly come down in the final year of the forecast. Moreover, the risk is that future fiscal deficits and debt could be larger than the OBR expects. Indeed, its forecasts for GDP growth over coming years are still well above the Bank of England’s latest projections. Any future economic and financial shocks would further throw the government off course.
All in all, the government’s measures to boost business investment and the supply side of the economy are encouraging, but the outlook for the UK economy over coming years is still likely to remain challenging amid high interest rates, a rising tax burden, and a difficult external backdrop. The elevated government debt burden may also reduce the government’s room for manoeuvre in the event of further shocks.