The Spring Growth Budget 2024

Rein in Government Overspend for £60bn Fiscal Headroom

• Freeze budgets and get public sector back to work for £60bn fiscal headroom says Growth Commission’s Spring Growth Budget report released tomorrow
• Retrieve some of £192bn overspend in Government’s planned spending where at least £80 billion could be recoverable
• Growth Commission proposes an initial £15 billion of net tax cuts in 2024-25 and further cuts as growth increases and spending is kept frozen
• Growth Commission Budget Identifies targeted tax cuts that will have a direct impact on boosting the economy using their long-term dynamic economic model
• Growth Commission sets out tax cutting and regulatory reform plan for 28% increase in GDP per capita by 2044 leading to higher GDP per capita of £14,570 or of £32,637 per household in their Spring Budget, with an initial 3.3% GDP per capital increase by 2029.

New Growth Commission research calculates the fiscal headroom of £60bn in the medium term to take advantage of in the upcoming Spring Budget if Government spending is significantly cut.

Revised up estimates of public spending since the Covid period by the OBR, suggests overspend of £192.2 billion of which £83.3 billion can be recovered if spending is cut. In March 2021 its estimated public spending in 2023-24, the current financial year, was £1,030.1 billion. Its latest estimate has risen to £1,222.3 billion, an overrun of £192.2 billion, which into account a proportion of this growth has been higher inflation. But even when measured as a percentage of GDP, which removes the inflationary element, the rise is 3.1% of GDP which is £83.3 billion in cash terms. [See Table 4&5 in notes to editors].

The Current Government target of 2% of GDP for 2029-30 would permit £60 billion of headroom by that date, even if the economy did not grow any faster than in the base case.

Why is the Government overspend so high?

A sharp collapse in public service productivity. ONS figures show that UK public services productivity is 6.7% down on its 2019 level. The number of UK civil servants has risen from 417,000 in 2016 to 529,000 in Q3 2023; the number of other UK public sector administrators has risen from 590,000 to 656,000 over the same period. The total number employed in UK public services has risen from 5.4 million at its lowest point in 2018 to 5.9 million in Q3 2023.

What can be done?

As part of their Growth Spring Budget, The Growth Commission proposes freezing budgets in cash terms for three years to start to reverse the trend of falling productivity. It also proposes investigating the increase of 725,000 in number of people out of the labour market from long term sickness to 2.8 million in December 2023, although its numbers do not assume savings in public spending from this as it is likely that helping the long term sick back in to work will have financial implications.

Using Fiscal Headroom and Tax Cuts

With the proposed savings in public spending and the likely additional economic growth resulting from its proposals, the Commission estimates conservatively that there will be £60 billion scope for tax cuts over the period to 2028-29 while virtually eliminating the budget deficit (see Table 12 from the report below). The Commission proposes cutting taxes net by £15 billion* in the first year but warns that scope for future tax cuts will be dependent on the additional growth from earlier tax cuts being achieved and on achieving the planned economies in public spending.

Using The Growth Model** Growth Commission calculates in their Spring Growth Budget that by reducing corporation tax from 25% to 15% over 20 years, removing anomalies from Income Tax, abolishing Inheritance Tax and abolishing the Tourism Tax, gives an estimated to boost GDP per capita by 6.0% creating fiscal headroom by 2044 and 3.3% increase to GDP per capita by 2029. [See table 1 and graph in notes to editors].

The Spring Growth Budget 2024 – Additional £14,750 pp by 2044

able 1 from the report below sets out the Commission’s policy proposals together with their impact on GDP per capita using their long-term, dynamic economic modelling for a reduction in public debt, no public borrowing and higher incomes.

The pay off from implementing these policies is a boost to GDP per capita for the UK in 2044-45 of 28%. This is a boost of £14,750 per person. It will also allow the gap in GDP per capita between the UK and the US in that year to fall from a forecast 74% to 36%.The largest single impact is from planning reform (6.4%) which would not only allow the housing supply to match demand but would also permit rapid infrastructure development. The Commission warns that this requires major changes – not just to planning rules themselves but also to ensuring that environmental regulations do not hold back development – there are  3,240 pages of guidance to planning inspectors and virtually every page needs updating. Better regulation of energy and smart green policies to achieve net zero to boost GDP per capita by 2.2%.Constraining migration, until planning reforms make development more sensitive to demand, is expected to boost GDP per capita by 2.1% even though a side effect would be lower GDP by 2.4%.Public borrowing should go into surplus by 1.7% in that year and the ratio of public debt to GDP to fall to 50.5% from an estimated 98.6% in 2024-25.

Comments

Douglas McWilliams Co-Chairman of the Growth Commission said:
‘The ONS believes that GDP per capita has fallen in each of the past 7 quarters for which they have data and by 0.7% in 2023 calendar year. This is underpinning the weakness in living standards that is leading to the UK falling increasingly behind the US and losing ground to the dynamic economies in Eastern Europe and Asia. This is not predetermined – there are policies which will reverse our trend and we have put them forward. The public have a choice– to support policies which will improve the economy or to support those which will hold it back. If the policies we put forward are implemented, we are confident that there will be a massive benefit, worth nearly £15,000 for every person in the country.’

Shanker Singham, Co-chairman of the Growth Commission said:
“We need to look at the economy through the other end of the telescope.  Instead of having convoluted conversations about whether there is fiscal headroom for tax cuts which as we have seen is a rapidly moving target that paralyzes decision-making, we need to figure what is it that will make the economy grow and then see what we can do in a targeted and forensic fashion.  What our budget proves is that not only is there fiscal headroom for tax cuts but there is most importantly the possibility of growing our economy to ensure further economic flexibility for Governments to come. Our budget is different, and rather trying to make political promises fit into a rigid and fiscal constraints, we’ve looked ahead and made the objective of our budgets all about growth for individual households in the UK. Using this budget as a blueprint for growth would be a start to get the UK back on track.”

The Growth Commission Spring Budget Breakdown

Tuesday, 27th February 2024 – The Growth Commission has published its Spring Growth Budget providing a new dynamic economic analysis of the UK economy and its prospects ahead of the Government’s Spring Budget. The Spring Growth Budget lays out a 20-year economic forecast as well as a set of growth focussed policies alongside analysis of their long-term impact on GDP and GDP per capita.

The Growth Budget Forecasts

• On unchanged policies GDP per capita is only expected to grow at a trend slightly above 1% with a decline in GDP per capita of 0.9%.
• Inflation falling rapidly to 2.2% in 2025 and remaining around the target level in the following years as shown

The Growth Budget Policy Proposals

This dismal outlook is not pre-determined. The Growth Budget has used its new economic model to analyse the long-term growth impact of a series of policy proposals.

• The proposals together, would deliver a boost to GDP per capita for the UK in 2044-45 of 28%. This is a boost of £14,750 per person. It will also allow the gap in GDP per capita between the UK and the US in that year to fall from a forecast 74% to 36%.
• The additional growth plus the impacts of the policies recommended will move the Government finances into surplus and bring down debt as a share of GDP to 50.5% by 2044-45.

The list of initial policy suggestions are outlined in brief below. Further detail on the proposals and their impact over time on GDP per capita and GDP have been modelled and provided. There is further information on each proposal in the report.

Tax Reform – 6.0% GDP Growth or £3,243 GDP per capita by 2044-45

• Cutting the main rate of corporation tax from 25% to 19% and then in the long-term reduce it to 15%
• Abolishing Inheritance Tax
• Remove the 60% -70% rate of tax on those earning more than £100,000 as their tax allowances are phased out.
• Unfreeze tax allowances in 2024-25
• End the high marginal rates of combined tax and benefit withdrawal in middle income ranges for families with children
• Abolishing the so-called ‘tourist tax’
• Review Stamp Duties and their impact on GDP per capita

Housing and Planning – 6.4% GDP Growth or £3,458 GDP per capita by 2044-45

• Reforming planning rules generally in line with the Australian system to increase rates of housebuilding, and enhance competition in hospitality and retail and make building easier
• Time limiting planning permissions – if you don’t use it you lose it
• Sharing the gains of planning uplift resulting from rezoning agricultural land to housing
• Zone based planning with a presumption that applications in line with the zoning will be accepted
• More expenditure on social housing
• Cut the time for approving large nationally important transport and energy projects by 75%

Energy, Smart Green and CBAM – 3.7% GDP Growth or £2,000 GDP per capita by 2044-45

Cutting energy costs to boost UK competitiveness – UK household electricity costs are amongst the highest in the world and more than double those in both US and France

• Implementing the proposals already made by the CMA for increased competition in energy supply
• Removing net zero levies
• Approving nuclear power stations
• Ending bans on fracking and on North sea development
• Improving competition in the energy market
• Making interconnection rules more competitive
• Increasing generation through North Sea oil and gas leases.
• Implement a Trade Tariffication Mechanism instead of CBAM

The Labour Market and Welfare – 4.3% GDP Growth or £2,324 GDP per capita by 2044-45

Enhancing Labour market flexibility to ease the pressure on business, including:

• Lowering the statutory notice period and severance pay for redundancy dismissals
• Improving the labour force participation rate by making welfare encourage people to work
• Eliminating restrictions on overtime work by deleting the EU Working Time Directive from the UK statute book
• Adjusting the minimum wage level

Infrastructure investment – 1.4% GDP Growth or £2,000 GDP per capita by 2044

Delivering better transport connections to reduce costs for businesses and consumers, including:

• Cancelling Great British Railways and introducing on track competition to reduce prices
• Financing new road building, eventually through user pricing administered by an independent authority

Public Sector Productivity – 4.4% GDP Growth or £2,378 GDP per capita by 2044-45
Spending in the public sector has risen dramatically since the onset of Covid but without the productivity improvements or taxpayer satisfaction to match. Proposals to address this include:  

• Reversing the post-Covid fall in public sector productivity
• Freezing budgets
• Modernising public services through technology
• Understanding the growth in welfare spend especially on sickness and reforming programmes to incentive work
• More spending on energy and transport infrastructure and on defence
• More spending on social housing

Notes to Editors

• Growth commission argues for cautious approach to borrowing because of risk of US debt crisis.
• The Spring Growth Budget: [Link]
• **The Growth Model: The Growth Commission uses two bespoke evaluation models together with off-model analysis. The important features of the models are that they look to understand the behavioural changes from policy developments and that they look up to 20 years ahead rather than just considering the short term.
• The Growth Commission [Link]: The Growth Commission investigates how low-growth economies can be transformed into high-growth economies. We look at impacts on growth of various factors, including demographics, size of government, tax rates, market distortions, trade policy, competition policy, housing policy and other factors.
• UK Spending compared with other countries: UK public spending growth has been higher than in any comparable country. The IMF forecasts a rise of 4.8% points in public spending as a share of GDP for the UK comparing 2028 with 2019; this is by far the largest in the G7 and compares with 2.7% in the US and 0.8% average in the EU G7 economies. The OECD forecasts a rise in public spending as a share of GDP in the UK from 2019-25 three times the OECD average.
• Table 1 The Spring Growth Budget GDP per capita increase by 2044 policy areas:

• Table 4 and 12 Comparable Projections Debt & Revenue tables between OBR and Growth Commission: