Our chart of the week sets out the fiscal projections calculated by the Office for Budget Responsibility (OBR) in its March 2024 economic and fiscal outlook that accompanied the Spring Budget seven months ago. These form the baseline that the OBR will be updating for economic developments, on top of which Chancellor Rachel Reeves will overlay her own fiscal plans.

As our chart highlights, the fiscal deficit – the shortfall between tax and other receipts and public spending calculated in accordance with statistical standards – was forecast to amount to £87bn in 2024/25, the current financial year, equivalent to 3.1% of GDP. It was then projected to fall to £77bn or 2.7% of GDP in 2025/26, £69bn or 2.3% of GDP in 2026/27, £51bn or 1.6% in 2027/28 and £39bn or 1.2% of GDP in 2028/29.

These projections by the OBR in March 2024 were based on the OBR’s assumptions for the economy over a five-year period and what that might mean for tax receipts, welfare demand and interest payments, combined with the then government’s plans for taxes and for departmental public spending.

The top half of the chart summarises how the change in the deficit between 2024/25 and 2028/29 can be analysed, between a £6bn net effect from inflation on receipts and spending, offset by £11bn from a higher level of taxation in and £43bn from a lower level of public spending in relation to the size of the economy. 

The higher level of taxation primarily reflects ‘fiscal drag’ from the freezing of tax allowances announced by the previous government, while its spending plans involved constraining spending on public services across central and local government – in effect a further period of ‘austerity’ to reduce the level of borrowing to below 2% of GDP.

The ability to reduce the level of spending to this extent was reported to be a significant risk by the OBR given that this would involve significant additional cuts in the budgets for unprotected departments such as prisons and local authorities, which seemed unlikely to be deliverable in practice, and the past pattern of spending reviews that have led to higher, not lower, spending requirements. Other commentators such as the Institute for Fiscal Studies were less kind, describing the former government’s spending plans as “unrealistic”.

The process for the Autumn Budget starts with the OBR updating this baseline for changes in economic assumptions, such as anticipated levels of economic growth, changes in migration numbers and interest rates, as well as updated expectations for current year revenues and expenditures. The latter could see the forecast deficit for the current financial year revised upwards to in excess of £100bn to cover at least some of the £22bn ‘black hole’ identified by the incoming government. This will depend on the extent offsetting savings may have been identified, as well as any benefits to receipts that may come from upward revisions in the projected size of the economy.

The OBR will also extend the fiscal projections for another financial year, in this case to 2029/30.

Tax and spending changes to be announced in the Autumn Budget will then be overlaid on to the projections, with the OBR assessing the impact of each change on its economic forecast. For example, tax rises should bring in more revenue to the Exchequer, but may have a negative impact on the economy if private sector consumption and investment falls, while higher spending, particularly higher public investment, could stimulate the economy. Unfortunately for the Chancellor, much of the economic benefit of any incremental public investment is likely to occur in the longer-term rather than during the five-year forecast period.

Fortunately, the waiting is almost over and we are now less than a week away from knowing what is actually going to be in the Autumn Budget. Watch this space for next week’s chart in which we plan to look at how much the fiscal baseline will have changed as a result of the Chancellor’s tax and spending decisions.