Budget 2018 Contents

Conclusions and recommendations

The late provisions of policy decisions to the OBR

1.The creation of the independent OBR has led to much higher standards for the forecasting process, and it is important that these do not slip. At this Budget, the Treasury failed to keep to the timetable it had agreed with the OBR at the outset of the forecasting process, with the result that the economy and fiscal forecasts are not fully consistent. The forecasting round had been particularly challenging due to a compressed timetable and relatively large underlying forecast revisions and policy changes. (Paragraph 8)

2.It is not enough to say, as the Chancellor did, that these problems are unlikely to recur since future and policy revisions are unlikely to be as large in future. In fact, the scale of the revisions was not unprecedented even in the short history of the OBR. There is no excuse for the Treasury taking a chaotic approach on timetabling and policy discussions. The Committee expects the Treasury to engage with the OBR on its suggestions for reviewing and improving the forecast timetabling process. The Committee will consider the detail of this review as part of its scrutiny of the 2019 Spring Statement. (Paragraph 9)

3.The forecast the OBR prepares for the 2019 Spring Statement may be the first opportunity it has to make a more detailed assessment of the UK’s short-term economic prospects after Brexit than the broad-brush assumptions it has made to date. It will also need to make its usual assessment of the impact of global developments on the UK’s growth prospects, on this occasion including the recent slowdown in the Eurozone. It will be even more important than usual that the Government co-operates effectively with the OBR and provides it with the resources and information it needs in a timely fashion. The Committee will seek assurance that it has done so. (Paragraph 10)

The economic outlook and Brexit

4.The Budget includes some policies to support over-indebted households, but the Treasury has once again failed to make an assessment of the overall state of household finances and household savings, and the implications for wider economic stability. This is despite the fact that the OBR forecasts the household cash savings ratio to fall further and into negative territory. It is concerning that the Treasury has no obvious strategy in connection with household finances. The Committee re-iterates its recommendation that the Treasury should report on these issues and set out a clear strategy for addressing them at future Budgets. (Paragraph 15)

5.The OBR already assumes in its forecast that the UK makes an orderly transition to its new economic relationship with the EU. Therefore, no “deal dividend” over and above the existing forecast could be attained simply by avoiding a disorderly outcome. Beyond this, there could be some improvement to business confidence and investment following a 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. (Paragraph 26)

The “end of austerity”

6.The Chancellor said that the “era of 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. This is an expansive but also imprecise definition. At the next Budget and Comprehensive Spending Review, the Chancellor will have the opportunity to set out his meaning in more measurable terms. This could include, for example, a plan for the overall levels of government revenue and spending as shares of GDP. (Paragraph 40)

7.This Budget did announce the largest discretionary fiscal loosening since the founding of the OBR, dominated by the NHS funding settlement. However, many decisions await the announcement of the envelope for and allocation of public spending at the Comprehensive Spending Review, when the Chancellor will need to substantiate his claims to be ending austerity. (Paragraph 41)

8.The Chancellor’s record to date has been to loosen fiscal policy when the public borrowing forecast falls, but not to tighten policy when it rises. If continued in the long run, this approach would lead to a ratcheting up of debt levels. (Paragraph 49)

9.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. However, the UK faces risks to its growth outlook, including Brexit and the recent slowdown in the Eurozone, that could lead to less favourable revisions to its growth outlook. 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”. (Paragraph 50)

The fiscal rules

10.At this Budget, the Chancellor could have met the fiscal objective to reach a balanced budget without further fiscal tightening, but instead he chose a fiscal loosening. Furthermore, the Chancellor told the Committee that securing economic growth was a better way of reducing the public debt-to-GDP ratio than running a budget surplus. Given that the Chancellor both appears to be disregarding the fiscal objective and has told the Committee it is not the best way of reducing the public debt, it is now clear that the fiscal objective now has no credibility, so it cannot be used by Parliament to hold the Government to account. The Committee recommends that it be replaced before the next Budget with something that accurately reflects Government policy and priorities, which clearly do not include running a budget surplus. (Paragraph 58)

11.The Chancellor is maintaining a £15 billion margin against the fiscal mandate in his official spending plans, but he is suggesting that all or part of it will be spent both in orderly and disorderly Brexit scenarios. This means that there is an inconsistency between the spending totals he has submitted to the OBR and those he has described to Parliament. (Paragraph 63)

Tax measures

12.There is evidence in some of the new tax measures that the Government has responded positively to issues raised in consultation. However, there are also indications that the consultation process could be used more consistently. A good consultation process, with effective participation from stakeholders including those likely to be directly affected by proposals under consideration, will help new measures meet the Committee’s guiding principles for tax policy. (Paragraph 72)

13.The Government is consulting on its proposals for a Digital Services Tax while at the same time taking part in international efforts to reform the corporate tax system. It is to be hoped that a global agreement on a fair and sustainable way to tax digital businesses will be reached soon. But, until or unless that happens, it is important that the design of the Digital Services Tax takes account of responses to the consultation and ensures that there is a level playing field between digital and physical businesses. (Paragraph 73)

Equalities impact assessment

14.There is some improvement in the provision of equalities and gender impact assessments in this Budget, but they fall well short of the “robust […] assessments of future Budgets, including the individual tax and welfare measures contained within them” that the Committee recommended at the last Budget. 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. (Paragraph 78)

Published: 12 February 2019