Treasury Committee publishes report on Budget 2018

12 February 2019

The Treasury Committee publishes a unanimously-agreed report on Budget 2018.

Key findings

Not credible for Chancellor to refer to Brexit “deal dividend”
Government must provide OBR with required information as Spring Statement 2019 may be first chance for OBR to provide detailed Brexit assessment
Government's fiscal objective has no credibility and should be replaced
Inconsistency in Treasury's spending totals as fiscal headroom set to be spent
Chancellor's “imprecise” statement that austerity is ending is yet to be defined in measurable terms
“Fortunate” Chancellor faces more difficult choices in future to fund pledge to “end austerity"
Budget 2018 Equalities Impact Assessment not robust enough

Report Summary

The Chancellor has spoken of a boost to economic growth once a withdrawal deal has been agreed with the EU, which he called a “deal dividend”. He said that there would be a “boost from the end of uncertainty, and a boost from releasing some of the fiscal headroom that I am holding in reserve at the moment.” The Office for Budget Responsibility (OBR) said it was “odd” to refer to this as a dividend. Rather, “what is being talked about is avoiding something really very bad.” As the OBR already assumes an orderly Brexit in its forecast, no ‘deal dividend' over and above the existing forecast could be attained simply by avoiding a disorderly, or no-deal, outcome. Beyond this, there could be some improvement to business confidence and investment following an orderly transition or a resolution of Brexit-related uncertainty that is not currently forecast by the OBR. It is not credible that this be described as a dividend.
At Budget 2018, HM Treasury failed to keep to the timetable that it had agreed with the OBR at the outset of the forecasting process, with the result that the economic and fiscal forecasts are not fully consistent. The Chancellor has said the circumstances that led to this failure are unlikely to happen again, but this reassurance is not enough. HM Treasury should engage with the OBR on its suggestions for reviewing and improving the forecast timetabling process. As the 2019 Spring Statement may be the first opportunity that the OBR has to make a more detailed assessment of the UK's short-term prospects post-Brexit, it will be even more important than usual that the Government provides the OBR with the resources and information that it needs in a timely fashion. The Committee will seek assurances that it has done so.
The fiscal objective in the Government's Charter for Budget Responsibility is to return the public finances to balance at the earliest possible date in the next Parliament. The Chancellor could have achieved balance by 2023-24 in Budget 2018 without further fiscal tightening, but instead he chose to spend more, largely through increased funding for the NHS. The Chancellor appears to disregard this objective and told the Committee that he considers securing economic growth as a better way of reducing the public debt-to-GDP ratio than running a budget surplus. It is clear that the fiscal objective now has no credibility, so it cannot be used by Parliament to hold Government to account. It should be replaced before the next Budget with something that accurately reflect Government policy and priorities, which clearly do no include running a budget surplus.
The fiscal mandate, also in the Charter for Budget Responsibility, targets cyclically-adjusted public sector net borrowing of no more than two per cent of GDP in 2020-21. This has been met with significant room to spare at every fiscal event since it was introduced. The Chancellor has referred to this margin, which the OBR forecasts to be £15.4 billion in 2021, as “fiscal headroom”. He has suggested that all or part of it will be spent both in orderly and disorderly Brexit scenarios, meaning that there is an inconsistency between the spending totals that he has submitted to the OBR and those that he has described to Parliament.
The Chancellor has said that austerity is coming to an end, which he told the Committee meant more generous funding of public services, real wage growth and a lower proportion of income going into taxation. When asked whether Budget 2018 amounted to an end of austerity, the OBR said it depends what is meant. The Chancellor's definition is expansive but also imprecise. At the next Budget and Comprehensive Spending Review, the Chancellor will have the opportunity to set out his meaning in more measurable terms.
Through his tenure to date, the Chancellor has loosened fiscal policy when the public borrowing forecast falls but has not tightened policy when it rises. If continued in the long run, this approach would lead to a ratcheting up of debt levels. The Chancellor was fortunate at this Budget, in that the OBR's reassessment of the structural level of the tax revenue to GDP ratio enabled him to fund increased spending plans and some tax cuts without an increase in the borrowing forecast. More difficult choices will likely lie ahead at future budgets about the UK tax base, and how to fund the Chancellor's pledge to ‘end austerity'.
The Committee has concluded previously that HM Treasury should use ONS and HMRC data to produce and publish robust equalities impact assessments of future budgets, including the individual tax and welfare measures contained within them. There has been some improvement in the provision of equalities and gender impact assessments in Budget 2018, but it falls well short of being robust. At the next Budget, there should be quantitative analysis of the equalities impact of individual tax and welfare measures in all cases where data are available.

Chair's comments:

Commenting on the Report, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said:

“The great cloud of uncertainty hanging over Budget 2018 was Brexit. And as the Chancellor has said, a new Budget may be needed in the event of no-deal. But the Treasury Committee has nevertheless scrutinised this Budget and made a series of recommendations to Government.
“On Brexit, the Chancellor spoke of a ‘deal dividend' of lower taxes and higher spending once a withdrawal agreement has been agreed. The OBR already assumes an orderly Brexit, so there won't be a ‘deal dividend' beyond the forecast just by avoiding no-deal. Business confidence may improve with increased certainty, but it's not credible to describe this as a dividend.
“It's clear that the Government should update its Charter for Budget Responsibility. The Chancellor appears to have disregarded the fiscal objective of achieving a surplus and says that he prefers securing economic growth as a better way of shrinking the debt as a proportion of GDP. As the objective now has no credibility, Parliament cannot use it to hold Government to account, and it should be replaced.
“The fiscal mandate – also in the Charter – has provided the Chancellor with over £15 billion of what he has referred to as ‘fiscal headroom', the spending of which would form part of the ‘deal dividend'. The Chancellor has suggested that he will spend all or part of the headroom regardless of the Brexit scenario, but the OBR has not included this expenditure in their forecasts, so there is an inconsistency between the OBR's figures and those described to parliament.
“Claims by the Chancellor that austerity is coming to an end are expansive and imprecise. He should set out what he means in more measurable terms, especially as he will face more difficult choices at future budgets for how to fund such a pledge.
“The upcoming Spring Statement may be the OBR's first opportunity to assess the UK's short-term prospects post-Brexit, and for Parliament to scrutinise the finances behind any withdrawal deal. The Government must, therefore, ensure that the OBR has the resources and information it needs to produce an accurate forecast.”

Further information

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