UK Finance Minister Rishi Sunak faces a “wild ride” in order to cut his deficit under new rules announced at the budget, according to the government’s Office for Budget Responsibility (OBR).
Speaking to the cross-party Treasury Select Committee, they said inflation was expected to fall within six-to-12 months, but the number of people leaving the workforce could keep it higher.
OBR chairman Richard Hughes suggested the Treasury may struggle to hit its new deficit targets to balance the budget by 2024/25, especially if interest rates rise, and would be in for a “wild ride”.
“The headroom he set aside to reach those targets is the second-lowest headroom that any chancellor has had when setting fiscal rules,” he said.
Hughes said a 1% interest rate rise could easily wipe out Sunak’s room to manoeuvre, the Press Association news agency reported.
Sir Charlie Bean, budget responsibility committee member at the OBR, said he believed inflation could continue beyond the forecast timeframe if supply chain constraints remain, with prices rising further.
He added that the jobs market could also push inflation up – estimated to be around 4% on average for the next year – leading to interest rate rises. The Bank of England is widely expected to push rates up for the first time since 2018 later this week.
Bean, a former Bank of England deputy governor said jobs were available but some in the workforce are taking early retirement and only half of EU migrants who left the UK during Covid are likely to return.
“The current inflationary pressures are associated with supply bottlenecks, labour shortages… largely sorting themselves out in the next six months or a year,” he said.
“But it is possible that it may take longer for those bottlenecks to resolve themselves globally and domestically. A key issue will be what happens with pockets of labour shortages.”
Hughes added the workforce is expected to shrink by around 160,000 and noted that the loss of migrants played a part in productivity falling. However, it was also part of a larger picture when trade with the EU remains well below pre-Brexit and pandemic levels.
“The bigger loss comes from the fact that we have a less trade-intensive economy which is less connected in terms of trade with the rest of the world and it has consequences for the long-run productivity of the economy as a whole, rather than necessarily the individuals who were either here or not.”
