Boring but important

Regular readers of this blog may remember that in the early months after its launch, I wrote about the UK economy performing better than the consensus had expected. I wrote again about this after the general election in July in a piece that talked about Lucky Labour and the tax windfall that would appear in the national accounts following what I expected in terms of upgrades to real and, importantly, nominal GDP.

Consequently, I was pleased to see in the ONS’s September 30th update, which was published this week, that as a result of some revisions, including a significant recalculation of nominal GDP, the UK economy in fiscal 2024/5 will be approximately 2%, or £60 billion larger than the OBR had previously forecast. As a consequence, the economy will generate (at a 40% tax share of GDP) approximately £22 billion more tax revenue than the OBR had modelled back in the March 24 budget. (Based on nominal GDP of £2.8 trillion)

Hey presto! The much discussed, mythical black hole in the nation’s finances has disappeared.

As I suggest in the title, this is a somewhat dry subject, but it is important because these revised numbers will obviously influence what the Treasury and the Chancellor decide to do in the budget at the end of this month. Already, it would appear that some of the early speculation about what Rachael Reeves will do is changing, not least because the OBR’s estimates of what specific measure will raise may well be different from the numbers embedded in the Labour manifesto, for example. It is also clear that the OBR will have to significantly upgrade their forecast of the tax revenue the economy will generate in the absence of any changes, which, of course, has many implications for any decisions in relation to revenue-raising measures.

The latest speculation is that the Chancellor will make some changes to how the numbers are presented and, in doing so, try to acquire the room to increase spending without increasing the debt/GDP ratio. For example, by taking capital project spending out of the current expenditure bucket. If capital spending is removed from the deficit calculation, the budget deficit would be down to 2% of GDP. In other words, not really the disaster that the new administration has tried to convince us we confront.

We will have to wait until the end of the month to know for sure, but as ever, as the reality of the economy’s underlying performance becomes more apparent, so some of the early consensus gloom about black holes and higher taxes has rightly started to dissipate.