ANYONE listening to Jeremy Hunt’s Budget speech today could easily have gone away with the impression the UK Government was single-handedly rescuing the country from its cost-of-living crisis, while somewhat miraculously fending off recession.
The Chancellor has developed quite the talent for presentation, and he deployed this to the maximum as he talked about Prime Minister Rishi Sunak’s pledge to halve inflation.
His audience could certainly have been forgiven for thinking his Budget measures were going to be playing the key part in driving UK inflation down from eye-watering levels above 10%.
That is absolutely not the case.
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The independent Office for Budget Responsibility’s latest forecasts, published to coincide with the Chancellor’s Budget, show annual UK consumer prices index inflation falling from 10.7% in the fourth quarter of last year to 2.9% by the final three months of 2023.
Citing measures including the decision to maintain UK Government support at a level which keeps energy bills for a typical dual fuel household at £2,500 per annum until the summer, Mr Hunt said: “Part of the fall in inflation predicted by the OBR happens because of additional measures I take today.”
However, he noted, some time later, that the combined effect of his Budget measures is to reduce “CPI inflation by nearly three-quarters of a per cent this year, lowering inflation when it is particularly high”.
Putting that figure in the context of the forecast decline tells the real story.
The Budget measures are expected to trim inflation a little, but the vast bulk of the fall is down to base-year effects: the fact that the fourth-quarter 2023 annual CPI inflation rate will be calculated by comparing prices then with those a year earlier. And consumer prices in the fourth quarter of 2022 were, overall, up 10.7% on the final three months of 2021.
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It is crucial to realise the projected fall in inflation does not mean prices will be easing, just rising at a slower rate, with the excruciating increases already being endured by households baked in permanently.
The context is also interesting here.
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Experts including former Bank of England governor Mark Carney have highlighted the impact of Brexit in driving up inflation.
And the UK Government’s decisions on how much support to provide on household energy bills have also driven up overall inflation, with the cost of gas and electricity having been allowed to soar.
Mr Hunt also made much of the UK avoiding technical recession, defined as two consecutive quarters of falling economic output.
However, the OBR is still projecting the economy will shrink this year.
The 0.2% decline in gross domestic product now forecast is not as bad as the 1.4% tumble projected in November. However, it still looks likely, on the basis of the International Monetary Fund’s forecasts, to leave the UK bottom of the pile of the Group of Seven leading industrialised nations this year in terms of its economic performance.
The OBR has revised up its UK growth projection for 2024, from 1.3% to 1.8%. However, it has cut its forecasts for each of the following three years.
It has reduced its prediction for growth in 2025 from 2.6% to 2.5%, while cutting the forecast for the following year from 2.7% to 2.1% and downgrading its projection for 2027 from 2.2% to 1.9%. These are, collectively, significant downgrades.
Mr Hunt attempted to flag some kind of Brexit boost in cutting duty on draught beer.
However, the OBR report provides a sober reminder of the far, far bigger impact of Brexit in reducing trade and productivity.
The OBR says: “Weak growth in imports and exports over the medium term partly reflect the continuing impact of Brexit, which we expect to reduce the overall trade intensity of the UK economy by 15% in the long term.”
It adds: “Overall, while net migration has been higher than we anticipated, investment growth has been significantly weaker than we expected before the referendum, and our assumption about the impact of Brexit on the UK’s trade intensity is broadly on track. As a result, we have not revised our view that productivity will be 4% lower in the long run than if the UK had remained in the EU.”
Mr Hunt may have presented a picture of some kind of spectacular Tory economic prowess, and even portrayed himself as something of a champion of productivity with his measures, but a deeper analysis tells a very different tale. The actual story is one in which the UK Government’s part in cutting inflation (which it fuelled in the first place) is small, technical recession is no longer projected but growth forecasts further out have been reduced significantly, and Brexit is causing major damage to trade and productivity.
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