Charter for Budget Responsibility

Stewart Hosie Excerpts

Monday 6th February 2023 Commons Chamber

[Stewart Hosie (Dundee East) (SNP)]

May I also offer my condolences to Robert Key’s family at this terribly sad news?

I say to the Chair of the Select Committee, the hon. Member for West Worcestershire (Harriett Baldwin), that I was a big supporter of the creation of the OBR, and I very much agree with her that an independent look at Government economic plans, when it is in full possession of all the information, remains a very sensible thing to do.

I start by thanking Richard Hughes, David Miles and Andy King at the OBR for their autumn 2022 “Economic and fiscal outlook”. However, it is worth noting, as they did, that this particular forecast, with its seven forecast rounds, was under three Prime Ministers, three Chancellors and three official forecast dates. I suspect that at least part of the reason why the numbers and forecasts in the report are so gloomy is the sclerotic and, one could argue, rather shambolic way in which the Government—the last set and the one before that; Prime Minister and Chancellor—have played fast and loose with the UK’s economic health over the past year.

What does the OBR tell us about the health or otherwise of the UK economy as measured against the new fiscal rules? Before I say a little about that, I point out that there are many ways in which one can have fiscal rules: forward-looking ones against forecasts, like this one, will tell us something; backward-looking ones measured against outturns will tell us something else; measing over a fixed timescale, or in this case a five-year rolling timescale, also is useful, as of course is a measurement over an economic cycle. Unfortunately, however, that tends to be a moveable feast, as it is not always clear when the cycle actually starts and ends. I am sure those on the Labour Front Bench will remember many happy debates over that particular set of circumstances in the past.

The OBR tells us that inflation is set to peak at a 40-year high and that wages and living standards are set to be squeezed by 7%, wiping out all of the growth for the past eight years. So the combination of external shocks, inflation, poor economic management and a series of policy decisions—some good, like the energy price support that the Minister mentioned; some bad, like the medium-term fiscal loosening, almost all of which has been reversed; and some modest, like the medium-term fiscal tightening, most of which was necessary—have led to an increase in borrowing of over £100 billion this year and next, and an additional £420 billion in debt by ’26-’27. The consequence for the economy is likely to be the central bank rate being higher than the March forecast, the exchange rate lower than the March forecast, and gilt yields, which are the real driver of the cost of borrowing, higher than the March forecast.

The good news from the OBR is that inflation is due to fall steadily until the end of 2024, but with mortgage rates on average still close to double where they were less than a year ago, constant vigilance from the central bank, the Financial Policy Committee and the Treasury is still required.

However, even with that it will be a long, hard road to recovery. The OBR reports that real household disposable income has seen the largest fall since ONS records began in 1956. As to what needs to be done to grow the economy, again the OBR tells us that it expects capital deepening to contribute only 0.3% to potential output growth over the next two or three years, lower than in the March forecast. It says that that reflects weaker business investment, which it expects to persist over the coming years.

So while, for example, the maintenance of the annual investment allowance at £1 million was welcome, there is still much more to do to attract big investment into the economy. This is one the most troubling things that the OBR reports. The output gap is not even expected to return to the March 2022 levels until 2027, towards the end of the forecast period. It is equally troubling that the trade current account balance is forecast to “widen sharply” from 2.2% of GDP in 2021 to 5.8% in 2022. That is the highest full-year deficit since ONS records began, and is mainly driven by a widening trade deficit.

Yet the Government appear to be in denial about the self-inflicted economic harm of Brexit, and it is against that backdrop that the Government have introduced the new fiscal charter: net debt falling as a share of GDP in 2027-28, the fifth year of the rolling programme, and public sector net borrowing not to exceed 3% of GDP in the same year. While the OBR reports that both of those are to be met, the truth is that both are only just met: public sector net debt by 0.3% of GDP; and public sector net borrowing by 0.6% of GDP—from memory, £9.5 billion and £18.6 billion. At the end of the forecast period GDP will be almost £3 trillion—that is 12 zeros.

There is no fiscal headroom; the margins are absolutely tiny. So one missed step, one missed calculation, one policy error—my goodness, we saw plenty of those two Prime Ministers and two Chancellors ago—or one external shock, and that either renders the targets unmet again or requires new targets to be put in place, or, frankly, means that the brutal cycle of cuts and austerity starts all over again simply in order for the Government, to meet a target irrespective of the consequences for the real economy.

I will end with this, which is said in sadness more than anger because I like the OBR and I like the idea of fiscal rules: we have no target for growth, for job numbers, for increased living standards, or for a boost in exports; rather, success will be measured by a Government avoiding a debt target by 0.3% of GDP. That is not, as the Minister said earlier, charting a path to growth; that simply demonstrates a crushing lack of ambition.