However, important to say we're not in this pessimistic scenario yet - the gas price increase is well below the aftermath of the Russian invasion of Ukraine, though it remains to be seen what happens to oil prices.
But the risk to the public finances still a key point to bear in mind going forward.
The OBR has modelled a pessimistic scenario in the past, discussed in our Spring Forecast response last week.
A 75% spike in energy prices for a year - not a projection from us or the OBR, to be clear - could mean a 5% spike in inflation, lower growth, and £20-40bn more borrowing in the medium term
Key context to talk about the cost of any potential energy support package: an energy price shock is already bad news in itself for the public finances.
Higher inflation and interest rates would push up debt interest spending, welfare spending, and put pressure on public services.
🚨 OUT NOW 🚨 What did we learn from the Spring Statement?
📈 Labour MP @lukemurphy.bsky.social, Resolution Foundation's @jamessmithrf.bsky.social and the IFS's @nickridpath.bsky.social join @alaintolhurst.bsky.social to discuss the state of the economy
🎧 Listen now: pod.fo/e/39ea85
(Sidenote: this is an average - worth noting how weird the profile looks. Growth much slower in 2029-30, perhaps coincidentally the year the fiscal rules currently bind, before speeding up again thereafter...)
There's lots of uncertainty about unemployment rise - OBR has consistently forecast it to come down quickly, but Bank of England suggest higher unemployment could be sustained for a few years.
This is v important for the public finances - sustained higher unemployment could hit borrowing hard.
This is a really key point from Ben. The recent debate has focused so much on how the govt can make the numbers add up to get a forecast current budget surplus.
But a forecast budget surplus is not the same as actually running a budget surplus - delivering this will be the real challenge.
The Spring Forecast had a higher revenue forecast, driven mainly by higher equity prices (up 8% between forecasts) adding £9bn extra receipts in 2030/31.
This is good news - but equities move regularly: given global volatility, there’s a risk higher forecast could be temporary.
The OBR has revised its annual net migration forecast down by 50-100k, with a small negative impact on forecast tax revenues.
If new ONS data for this year shows lower immigration, the OBR could further reduce their net migration assumption, with larger effects on tax revenues.
The OBR’s current budget forecast has barely changed, with borrowing still set to fall over the next few years.
Past governments have often set out plans for a current budget surplus, but it’s very rare that they’ve achieved it. That will be the key challenge going forward.
But for the purposes of the official forecast (and so performance against the fiscal rules), the OBR modelling is what matters.
A sustained drop in net migration therefore poses a risk for the Chancellor to worry about – a risk that could crystallise later this year.
There are legitimate questions about how the OBR model the effects of migration – e.g. they account for impacts on tax revenues and welfare spending, but not on the cost of delivering public services (where budgets are treated as fixed).
The OBR will very likely wait for more data before adjusting their migration forecast, but if the recent fall in migration is sustained, and the medium-term projection is revised downwards, it could hit tax revenues and push up their borrowing forecast substantially.
We're expecting a quiet Spring Forecast, without major policy changes or forecast revisions. But there are still things to keep an eye on.
One important one is the migration forecast, where recent data highlights potential risks to the forecast in future.
A quick thread:
Chart shows cumulative monthly public sector net borrowing this financial year and last year, £bn. Title states: "Total borrowing over the course of this year is now lower than last year, and has fallen faster than was expected at the November budget."
Today’s public finance figures show borrowing is falling, and falling even faster than forecast back in November.
This is important: the Chancellor’s plan for meeting her fiscal rules is predicated on borrowing falling significantly this year and next.
Here it is, my magnum opus: an analysis of what’s wrong with the UK’s approach to fiscal policy (under this and previous governments), and a proposal for what an alternative to pass-fail fiscal rules could look like.
I’ll follow up with a longer thread later.
There is an increasing sense that the UK's approach towards fiscal policymaking, and in particular the excessive focus on "headroom", isn't delivering good outcomes.
Come along on 19 February to hear me make the case for how we could do things differently, and to hear from our terrific panel.
Breaking revenues down, taxes we might expect to respond more quickly to inflation or wage growth, such as VAT and PAYE Income Tax, haven't come in above either forecast.
If inflation had started to come through, we'd expect to see movement here first, and we haven't. (4/4)
Revenues from March to December are over £3bn below that expected in March, and over £2bn below that forecast at the end of November - a sign that even when incorporating data from the summer, the OBR's forecast still looks optimistic. (3/4)
In November, the OBR forecast higher short-term revenues from inflation and wage growth than previously expected - this was what made the forecast better news for Rachel Reeves than expected.
However, there is still little sign of these higher tax receipts, despite persistent inflation: (2/4)
New ONS public finance figures for December show borrowing from April to December was below 2024, in line with forecasts.
This is good news, but under the hood there's little sign of a pickup in revenues from inflation - an important thing to watch out for going forward. (1/4)
This is important as last month's OBR forecast (no monthly breakdown of this yet) expects a big increase in receipts by 2029/30 from higher inflation, boosting the public finances.
That may materialise, but it’s concerning that it hasn’t yet - one watch out for in the new year
New ONS public finance data today shows central government revenues are still lagging significantly below March expectations.
Given inflation has been higher than forecast, this is surprising - even VAT receipts, which one might expect to rise with inflation, are below forecast
Key thing about the OBR's downgrade then upgrade to revenues: much of it is from inflation and wage growth this year boosting tax take.
While inflation and wage growth are up, we're yet to see any increase in tax revenue in recent public finance data. The government will hope it materialises soon.
Underrated part of yesterday's Budget was what's happening to public service spending in 2028-29. Spending Review settlements reopened just 5 months after the SR to account for loosely-specified 'efficiency savings' of £1.4bn in 28-29 (rising to 4bn in 29-30)
Some early takeaways on the public finances from us @theifs.bsky.social. Really interesting thing to me is that the much-anticipated productivity downgrade didn't end up creating that big an increase in forecast borrowing. This means the policies we've seen today have grown headroom substantially.
One reading of this remark is that the fiscal rule requiring debt to be falling as a share of GDP in 2029/30 is now the one that binds (as cuts to capital spending wouldn't help to meet her borrowing rule). That's entirely possible - and was what we predicted in the IFS Green Budget, as it happens.
If there's one key message for the Chancellor from our analysis published today, it's this:
Doing a bigger package to increase ‘headroom’ wouldn’t be costless – but nor is limping from one forecast to the next under constant speculation that policy will be tightened again.
We’ve written about this in more detail in our chapter of the IFS Green Budget on the public finances which came out today. You can read it here: ifs.org.uk/publications...
Frequent policy changes lead to overly frequent and overly rushed policy adjustments. Other measures like a range could help, but if the Chancellor wants to stave off the speculation and uncertainty like we’ve seen recently for more than a few months, more headroom is likely to be needed.