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OBR: No Growth Boost from Labour’s £70bn Budget Splurge

Britain’s fiscal watchdog has poured cold water on Labour’s ambitious £70 billion budget, warning the colossal spending spree is unlikely to sustainably boost economic growth over the next five years despite providing a short-term lift to output. The Office for Budget Responsibility (OBR) pulled no punches in its assessment of Chancellor Rachel Reeves’ fiscal plans, cautioning that the “large, sustained increase in spending, tax and borrowing” will leave the average growth rate unchanged come the end of the parliament.

While the spending splurge is set to provide a fleeting boost to economic output, the OBR argues that the gains will be short-lived. Richard Hughes, head of the OBR, highlighted that the tax burden is on track to hit a historic high of 38% of national income by 2029-30, with an eye-watering £36 billion in tax hikes on the cards. This fiscal squeeze, the OBR contends, will “crowd out” private sector activity and investment, ultimately dragging living standards down by around 1% in the final year of the forecast period.

A Ballooning State and a Squeezed Private Sector

Under Labour’s fiscal framework, the size of the state is set to balloon to a whopping 44% of annual national income, a staggering five percentage points higher than pre-pandemic levels. This expanding public sector, the OBR argues, will end up competing with private businesses for scarce resources, driving up prices and putting the squeeze on wages. David Miles, chief economic adviser to the OBR, pulled no punches:

“The [fall in disposable incomes] is inevitable when the government is taking 2% of national income to spend on public services and public investment.”

Debt Interest Costs Set to Soar

The borrowing binge isn’t without consequence. The OBR warns that debt interest costs are set to breach the £100 billion mark in each year of the parliament for the first time, putting a major strain on the public purse. While the economic outlook for the next two years has seen a modest upgrade since March, with growth forecasts revised up to 1.1% for this year and 2% for 2023, the picture further out is far less rosy.

Growth Prospects Downgraded

The OBR has downgraded its growth projections for the second half of the parliament, with output now expected to expand by just 1.8% in 2026, down from the 2% forecast in March. For 2027, growth is seen slowing further to 1.5%, a marked downgrade from the 1.8% previously penciled in. This deteriorating growth outlook raises major questions about the sustainability of Labour’s fiscal approach.

New Fiscal Rules, Same Old Problems?

Chancellor Reeves has unveiled two new fiscal rules in a bid to keep spending in check. The first mandates that day-to-day spending remains in balance, while the second permits the Treasury to factor government assets into its national debt calculations. However, with the OBR forecasting a £19 billion real-terms spending squeeze for unprotected departments like justice and transport, it remains to be seen whether these rules will be enough to keep Labour’s fiscal plans on track.

As Britain navigates an increasingly turbulent economic landscape, the OBR’s stark warnings about the limits of Labour’s budget bonanza are sure to fuel heated debate about the country’s fiscal future. With growth prospects dimming and the tax burden set to hit unprecedented highs, the road ahead looks anything but smooth. The question now is whether Labour can chart a course towards sustainable growth and prosperity – or whether its spending spree will ultimately lead Britain down a fiscal dead end.