OBR: Government less able to resist spending demands after election losses
4 min read
Theresa May's failure to win a majority at the general election has weakened the Government's grip on public spending, the Government’s economic watchdog has warned.
The Office for Budget Responsibility (OBR) said the UK’s public finances were now “more sensitive” to increases in interest rates and inflation due to the high levels of debt and the continued budget deficit.
It highlighted the recent deal with the DUP – which saw the Conservatives increase Northern Ireland’s budget by £1bn and ditch its plans to replace the ‘triple lock’ on state pensions – as an example of potential increases in spending.
“Debate over ongoing real terms cuts to public sector pay has also intensified,” it said.
“The advent of minority government could also loosen the Treasury’s grip on public spending control.”
The OBR’s fiscal risks report also said that measures scrapped to rush the Finance Bill through Parliament before the election could cost £3.5bn by 2020/21, though some measures have been implemented outside legislation.
Labour’s John McDonnell said the report was an indictment on the Government’s management of the public finances.
“The Tories want to blame Brexit for their failures on the economy, but what this report really reveals is that one of the biggest risks to our economy is Theresa May’s weak government, and the last seven years of Tory economic failure,” said the Shadow Chancellor.
But Philip Hammond – whose statement that the public was growing “weary” with austerity was noted by the OBR – said the report was a “stark reminder of why we must deliver on our commitment to deal with our country’s debts”.
“The Labour party would ignore these warning signs from the OBR, adding to the bill that our younger generation will have to pay,” the Chancellor said.
“Under Jeremy Corbyn’s catastrophic plans, the independent Institute for Fiscal Studies estimate the national debt would be over £100bn higher by the end of this Parliament than under a Conservative government - or over £6,000 per working household.
“Now is the time to stick to our plan of tackling our debts while investing in our future so that we can deliver economic security and high quality jobs for hard-working people across the country.”
BREXIT
The OBR also says Brexit will “affect the likelihood and impact” of the risks already present to the UK’s economy.
It stressed that the long-term economic picture would be affected far more by the terms of the UK’s future relationship with the European Union than the size of the financial settlement when the UK leaves.
“A lot of attention focuses on the possible ‘divorce bill’, but, while some numbers mooted for it are very large, a one-off hit of this sort would not pose a big threat to fiscal sustainability,” it said.
“More important are the implications of whatever agreements are reached with the EU and other trading partners for the long-term growth of the UK economy, which we do not attempt to predict here.
“If GDP and receipts grew just 0.1 percentage points more slowly than projected over the next 50 years, but spending growth was unchanged, the debt-to-GDP would end up around 50 percentage points higher.”
Although it did not assess the impact of the possible outcomes of Brexit negotiations, the OBR warned that a “more severe Brexit impact or ‘no deal’ scenario could have bigger negative effects” on future tax revenues from the financial sector.
Would-be Liberal Democrat leader Vince Cable said the OBR had “laid bare the risk to our economy and public finances posed by this Government's reckless approach to Brexit”.
“Even a small deterioration in growth could mean billions of pounds less funding for our public services in the long-term,” he added.
“Theresa May has shown complete disregard for the economic consequences of the extreme Brexit she has chosen.
“This sobering warning from the independent Office for Budgetary Responsibility should serve as a wake-up call.”
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