There are significant risks to the Government’s spending plans laid out in last week’s Budget by failing to cost up any post-pandemic spending beyond March next year, the Office for Budget Responsibility (OBR) has said.
The Government’s own independent economic forecasters said questions remain over why Chancellor Rishi Sunak made no provisions for longer-term spending.
They warned the lack of detail comes despite the Government already flagging longer-term costs would be required to cover annual vaccination programmes, ongoing test and trace services and longer-term health costs.
Economists at the OBR told MPs on the Treasury Select Committee that they hoped for greater clarity later this year but said with no costings, departmental spending may need to be cut elsewhere to meet any shortfalls.
In a wide-ranging hearing, the officials also said the Chancellor’s super deduction to stimulate business investment is unlikely to increase overall spending and the overall tax-to-GDP (gross domestic product) levels may remain high longer-term to fund the ageing population longer-term.
The panel also revealed high income, middle income and retired households have saved a combined £180 billion from the pandemic – as shops, pubs and restaurants remain shut – but said this is unlikely to be spent as soon as restrictions end.
On the lack of detail for future spending plans on Covid-related costs, OBR chairman Richard Hughes said: “It certainly makes our job more difficult in assessing the credibility of the Government’s fiscal plans when essentially there’s only fog beyond March of 2022.”
He added: “We think there are some significant risks to the Government’s spending plans beyond 2021 because it assumes the rescue phase of this pandemic is over and the Government can put all the Covid genie back in the bottle by March 2022.”
Mr Hughes added that “big questions” remain around the future of subsidies for the railway operators and whether costs may be cut from other departments to fund any shortfall.
The OBR chief added: “They’ve made no explicit provision for things like pressures they’ve already recognised in their road map.
“We see a pretty long list of legacy costs coming out of this pandemic and very little evidence of explicit provision to meet those costs.”
Sir Charlie Bean, member of the Budget Responsibility Council added that the next stage of recovery will be down to how much scarring will hit the economy and how much cash will be spent by consumers.
The OBR predicts GDP could take a 3% knock from scarring, although the numbers remain unclear and could shift depending on the easing of restrictions.
He added that £180 billion was saved during lockdown by high and medium income households, alongside pensioners, and said if it was all spent in the next 12 months a further 6% would be added to GDP.
But Sir Charlie added the OBR expects only around 5% will be spent each year, rather than any “post-pandemic euphoria”.
The economist said: “A relatively small fraction will be leaking into consumer spending but most of it will be saved either in bank accounts or possibly moved into other financial markets, or into the housing markets.
“One of the reasons the housing market has surprised us a bit on the upside is some of those savings have been used to be put to a deposit.”
On the Chancellor’s super deduction plans, which gives businesses £130 for every £100 of investment, the OBR said it expects to see a 10% boost in investment but said there would not be an overall increase in spending.
Mr Hughes said: “A large part of the intention of the policy is actually to move investment around rather than to increase it overall.
“We do think that the effect on the overall level on investment is likely to be quite limited but its effect on moving investment around is quite strong.
“If the intention is to fuel an investment-led recovery over the next few years, which is our understanding of the policy, then the policy is quite effective.
“If it’s a policy which is designed to get the overall level of business investment up then based on that definition it has a pretty marginal effect on the overall level of investment in the long-term because you’re just bringing forward investment from future years into current ones.”
The super deduction incentive will cost the Treasury £29.8 billion over the course of the next five years.
But it will be made up by £47.8 billion collected from corporation tax receipts, including the rise in the tax rate from 19% to 25% in 2023.
The OBR chairman pointed out that the tax burden is at levels rarely seen in the UK in the post-war period, pointing out it typically falls back quickly afterwards.
However, Mr Hughes added: “One of the dilemmas all advanced country governments face is where are they going to find the revenues from a shrinking working population to support a larger and larger population out of work, and that has been driving a rise in tax-to-GDP ratio in almost every advanced economy.”