Today’s publication of the Office for Budget Responsibility’s (OBR) 2020 Fiscal Sustainability Report (FSR) fulfils the OBR’s legal obligation to publish an analysis of the sustainability of the public finances over the long-term and an assessment of the public sector balance sheet at least once every two years. This report has been laid before Parliament today and copies are available in the Vote Office and Printed Paper Office. The OBR also produces a biennial fiscal risks report (FRR) to which the Government are required to respond within a year. This statement provides the Government’s response to Office for Budget Responsibility—Fiscal risks report July 2019 [CP131], laid 18 July 2019[1].
The action the Government have taken in response to the covid-19 pandemic was necessary to protect public health, support household incomes, and to minimise permanent damage to the economy—thereby supporting growth, employment and the public finances over the medium to long term. As the OBR has said in the FSR:
“The outlook would have been much worse without the measures the Government have taken. These have provided additional financial support to individuals and businesses through the lockdown. They should also help to limit any long-term economic scarring, by keeping workers attached to firms and helping otherwise viable firms stay in business”.
OBR 2020 fiscal sustainability report
The magnitude and duration of the economic shock caused by covid-19 will have important consequences for the medium and long-term fiscal position. In all three scenarios the OBR has published in the FSR, the level of borrowing this year is significantly higher than expected in the OBR’s spring Budget forecast. Public sector net borrowing is projected to reach between 13% and 21% of GDP in 2020-21, with differences across scenarios reflecting the size of the economic shock. This in turn means that public sector net debt is also projected to be higher compared to the spring Budget forecast under all scenarios, although the OBR has highlighted that low borrowing costs help to make this more affordable in the near-term. The gilt market is deep and liquid with a good track record in responding smoothly to increases in gilt supply. Underlying demand for the UK’s debt remains strong, with borrowing costs at historical lows, signalling confidence in the UK’s institutions.
The Government have taken significant action to support the recovery and minimise permanent damage from the pandemic. In the long-run, the OBR also expects demographic change and other cost pressures in health spending to put upward pressure on public spending while leaving revenues broadly unchanged. The Government are committed to fiscal sustainability and ensuring the long-term health of the public finances. The Government will set out further details on their plans to put the public finances back on a sustainable footing over the medium-term at the next Budget, alongside an updated OBR forecast. As part of this, as set out in the March Budget, HM Treasury is reviewing the UK’s fiscal framework to ensure it remains appropriate for the macroeconomic context, while ensuring the sustainability of the public finances. The FSR provides important analysis and scenarios which will be used to inform this review.
Managing fiscal risks from covid-19
In July 2019, the OBR published its second fiscal risks report covering the main risks to the public finances at that time. With covid-19 now clearly the most significant immediate source of fiscal risk facing the UK, this response to the report focuses on how the Government are managing the fiscal risks associated with the pandemic.
The work of the last 10 years in bringing borrowing and debt back under control means that the UK was well-placed to respond to the immediate and long-term challenges posed by covid-19.
The Government acted quickly to implement interventions containing the initial economic shock from the pandemic. When designing these interventions, the Government drew on the experience gained from HM Treasury’s Balance Sheet Review[2] and international best practice[3] to ensure that fiscal risks are managed effectively. The IMF commended the Government’s powerful response to the initial shock of covid-19, finding the interventions to be large, substantial and carefully targeted[4].
In the first phase of the economic response to covid-19, the Government kept people attached to their work, protected their incomes and supported businesses, delivering one of the most generous and comprehensive packages of support globally, with a fiscal response totalling £160 billion. While the economic impacts of covid-19 and the Government’s necessary response have come at a significant fiscal cost, the costs of failing to act to support public services, businesses, and workers would have been much higher.
Building on the action taken in the face of the immediate threat posed by the virus, the Government are now proceeding with the second phase of their response, supporting the UK’s economic recovery while continuing to prioritise people’s health. The plan for jobs announced last week, made up to £30 billion available to help kick-start the nation’s economic recovery while continuing to prioritise people’s health by: introducing a new job retention bonus to encourage firms to keep on furloughed workers; supporting jobs with direct help to find work and to gain the skills people need to get a job; protecting jobs in the hard-hit hospitality and accommodation sectors and at attractions by supporting demand for these businesses, giving them confidence to reopen; creating jobs with action to get the property market moving, to increase and bring forward infrastructure investment, and to make homes greener, warmer and cheaper to heat.
The third phase of the Government’s plan will be set out in the autumn with measures to support the longer-term recovery through a Budget and a spending review. These will detail further plans to invest in public services, to support innovation and growth-enhancing infrastructure with a national infrastructure strategy, to seize global opportunities and to level up opportunity across every region and nation of the UK.
Wider fiscal risk management
While the immediate focus of Government action is on dealing with covid-19, the management of the wider risks facing the UK public finances remains important. The Government have acted to address a number of the risks that were discussed by the OBR in FRR 2019.
To address the long-term challenge of low productivity growth, Budget 2020 announced measures investing in UK infrastructure, backing tech and innovation, making tax changes to support firms to invest, and introducing measures to support a dynamic and competitive economy. The Prime Minister also announced on 30 June that we will be improving the quality, speed and efficiency of delivering infrastructure through a new infrastructure delivery taskforce named Project Speed.
In the longer-term, climate change remains a significant challenge for the wider public finances. Demonstrating the Government’s commitment to mitigating climate change, in November 2019, the Chancellor launched an HM Treasury review into how the transition to net zero greenhouse gas emissions will be funded and where the costs will fall. Spring Budget allocated £640 million for tree planting and peatland restoration, over £1 billion for ultra-low emission vehicles and introduced tax measures to encourage greater energy efficiency and reduce plastic waste. The UK is also increasing its international climate finance support for developing countries to at least £11.6 billion. To improve the UK’s climate resilience, the Government announced a doubling of investment in flood and coastal defences in England to £5.2 billion over the next six years. The devolved Administrations will benefit from the Barnett consequential of this substantial increase in Government investment in flood and coastal defences.
To manage risks associated with non-bank financial intermediation and increase the resilience of the UK financial system, in the remit for the Financial Policy Committee (FPC), HMT recommended that the FPC publishes a detailed assessment of the oversight and mitigation of systemic risks from the non-bank sector. The FPC has confirmed it will publish preliminary findings in the August financial stability report, followed by a more detailed report that outlines gaps in non-bank resilience and potential measures that may be taken to increase resilience.
The OBR also highlighted fiscal risks related to tax reliefs. The Government recognise the need to monitor and evaluate existing tax reliefs; the Government will continue to monitor their use and act where appropriate, for example through the recent reforms to Entrepreneurs’ Relief, and the planned changes to the entitlement to use red diesel. HMRC is committed to increasing the number of published costs of tax reliefs and in May 2020 published cost estimates for another 47 non-structural tax reliefs. HMRC will continue to build on this to increase transparency.
[2] The Balance Sheet Review (BSR) was launched in 2017 to identify opportunities to dispose of assets that no longer serve a policy purpose, improve returns on retained assets, and reduce the risk and cost of liabilities.