by Callum McGoldrick, researcher
The news leading up to the Spring Statement has been anything but encouraging for the Chancellor. To set the tone for what’s shaping up to be a grim budget, the Telegraph announced that the Office for Budget Responsibility (OBR) will halve its growth forecast for the upcoming financial year. This comes as a particularly stinging blow given the Chancellor’s repeated assertions that economic growth is the “number one mission” of this Labour government. With this reduction in growth prospects, questions are bound to arise about how the government plans to fulfil its economic promises.
Things only got worse on Friday with the latest Office for National Statistics (ONS) report, which revealed more unsettling figures. Borrowing and spending are both up, and public sector net debt has reached levels not seen since the 1960s. In an especially troubling development, borrowing surged by £14 billion compared to the same period last year. With a month still to go in this financial year, borrowing has already exceeded the OBR’s full-year estimate by £5 billion. Even if Liz Kendall is able to make the savings she claims in the benefits system, the country's finances will only be in line with previous forecasts.
A key contributor to this substantial increase was the above inflation hike of public sector pay, a move that revealed Labour’s prioritisation of the public sector. Increased borrowing under Labour is also adding to the national debt which currently stands at £2.6 trillion.
Given the bleak state of the public finances, it’s clear that Kemi Badenoch isn't far from the money when she dubs the Spring Statement an emergency budget, with the Chancellor potentially announcing further spending cuts, while doing nothing to water down the tax rises last autumn, despite the damage already being done. There is, however, a faint silver lining in the report. The public sector deficit narrowed by £1 billion compared to the same period last year, reducing it to levels last seen in February 2022. While still running a deficit of £3.3 billion in February this year, this reduction, however small, could offer some reassurance in the face of an otherwise challenging economic environment.
Wednesday's Spring Statement will therefore be delivered under immense pressure. With the OBR's growth forecast slashed and public borrowing soaring, the Chancellor faces a delicate balancing act. The faint glimmer of hope provided by the slightly reduced deficit offers a small window of opportunity, but it's unlikely to significantly alter the overall narrative. The real question is whether the government will prioritise fiscal responsibility through spending cuts or attempt to stimulate growth through massive public sector investments, despite the limited fiscal space.
The political implications of this statement are profound. Labour's economic credibility hinges on its ability to navigate these turbulent waters. Taxpayers will be keenly watching for signs of a coherent strategy, not just short-term fixes. The potential for further tax hikes, coupled with spending cuts, will hurt a population already grappling with high living costs. Conversely, a failure to address the mounting debt could undermine confidence in the government's ability to manage the economy as debt interest payments grow larger and larger, syphoning off ever increasing sums of taxpayers money.