Forecast boost gives Hammond bigger Brexit warchest

13 March 2019, 13:20 | Updated: 13 March 2019, 17:46

The most crucial number in the Spring Statement was £26.6bn.

That's the amount of headroom the chancellor will have in 2020-21 against his "fiscal mandate" - his borrowing target - as a result of the Office for Budget Responsibility's revisions to its borrowing forecasts.

It is sharply higher than the figure of £15.4bn given at the Autumn Budget.

:: Hammond: Economy 'robust' as growth forecasts cut

It gives Philip Hammond significantly more money to spend on either mitigating the impact of a No Deal Brexit or, in the event of an orderly Brexit, for extra spending on public services or on cutting taxes.

How that money is spent will be determined in the Comprehensive Spending Review, due to be launched before the summer recess, before being announced in this autumn's budget.

That budget will set out the government's spending priorities for the next three financial years - which, as that period will take in the date of the next general election, means this year's budget will be the most important for some time.

The extra firepower was made possible by more reductions in expected borrowing levels in years to come.

Economists have likened the OBR generating that extra headroom for the chancellor to the way ordinary people find money in the back of their sofa.

Accordingly, there have been warnings that what the sofa gives, the sofa can take back.

But Mr Hammond's sofa has not taken anything back. It's carried on giving.

The OBR's borrowing forecasts have been dramatically reduced since the Autumn Budget - by £2.7bn this year and by £2.4bn in 2019-20.

But the real reductions kick in early in the next decade: the OBR now expects borrowing in 2020-21 to be £5.5bn lower than it was forecasting as recently as the Autumn Budget and, in 2021-22, to be £6.2bn lower.

In 2022-23, borrowing is now expected to be £6.4bn lower than previously forecast and, in 2023-24, £6.3bn.

This has been made possible because while the OBR has downgraded its growth forecast for the UK for this year, from 1.6% to 1.2%, it is clearly assuming the weakness this year is temporary.

It has left its forecast for 2020 unchanged at 1.4% and now expects growth in 2021 and 2022 to be stronger than it was predicting in the Autumn Budget.

Where did the OBR find the extra money?

Well, just over half of it has come from tax receipts, which have been stronger than expected.

This is particularly the case for income tax and national insurance.

John McDonnell, the shadow chancellor, complained in his response to the Spring Statement about "a large-scale jobs market of low pay" but higher tax receipts are the best proof there is that earnings are picking up across the economy.

The extra money has also come from lower spending on debt interest.

Inflation as measured by the Retail Prices Index, the measure which determines the rate of interest on gilts (government IOUs), has been much lower than expected.

Weighed against that, the OBR is expecting welfare spending to be higher than it was previously anticipating, particularly on disability benefits.

Also going against the government have been lower tax receipts from oil and gas revenues due to the very sharp drop in crude prices during the final three months of last year.

Of course, Mr Hammond has more or less spent the extra money freed up at the time of the Autumn Budget last year, lavishing it on what the Prime Minister called a 70th birthday present for the National Health Service.

So other spending departments will be hoping for a better lick of the public spending lollipop this time around, in particular, those responsible for schools, defence and the police.

The £100m made available to the police to tackle knife crime, arguably the most striking spending commitment unveiled today, may be a taste of things to come.

However, while Mr Hammond has an increasingly positive story to tell about the economy, and, in particular, about what it is no exaggeration to call a jobs miracle, it was possible to detect some pessimism.

Warning of the consequences of a No Deal Brexit, Mr Hammond said: "Leaving with no deal would mean significant disruption in the short and medium term and a smaller, less prosperous economy in the long term, than if we leave with a deal.

"Higher unemployment, lower wages, higher prices in the shops.

"That is not what the British people voted for in June 2016."

And that is the key fact underpinning this Spring Statement.

The OBR's revisions have been made possible by its assumption "that the UK makes an orderly departure from the EU on 29 March into a transition period that lasts to the end of 2020".

"Alternative outcomes, including a disorderly 'no deal' exit, remain the biggest short-term risks to the forecast," it said.

In other words, the OBR is saying, a No Deal Brexit could well see Mr Hammond's extra spending money vanishing back into the sofa.

Moreover, accounting changes to reflect the fact that many graduates will never repay their student loans, look set to eat into the Chancellor's headroom by up to £12bn.

Meanwhile, although the chancellor could remind MPs that by 2023-24 government borrowing will be the lowest in 22 years, there is another way of putting it.

It is that the government will still be borrowing money well into the next decade, by which time, it will be getting on for a quarter of a century since a British government last managed to balance the books.