The chancellor was handed an extra £51bn for his budget after the government’s independent forecasting unit upgraded its forecast of the economy’s recovery to a more optimistic outlook for growth this year.
In a shift from its stance in March, the Office for Budget Responsibility said lower government spending and higher tax receipts had improved the public finances in 2021.
Economic growth will be 6.5% this year, up from the 4% growth rate forecast at the last budget in March and completing the return of the UK’s GDP to its previous peak by Christmas.
However, the OBR’s economic health check brought forward 1.3 percentage points of growth from its forecast for 2022, which was reduced from 7.3% to 6%. That meant the increase in predicted GDP growth for this year from 4% to 6.5% only added 1.5% to the total gain over two years.
The OBR reduced its 3% estimate of the long-term damage from the pandemic over the next five years, but the forecaster failed to follow the prediction of the Bank of England that scarring from unemployment and business insolvencies would knock 1% from the trajectory of GDP growth seen before 2020. The OBR said the scarring would leave the UK economy permanently 2% below its previous trade growth rate.
At the last budget, the OBR predicted unemployment would peak at 7.5%, but instead it only rose to 5.2% in December 2020 and has been falling ever since.
Tax receipts have stayed well ahead of previous OBR forecasts during the spring and summer this year, handing the chancellor four-fifths of the £51bn reduction in the deficit since the forecast in March.
Borrowing this year was due to hit £355bn, or 9.7% of GDP, before falling to £74bn in 2025-26, or 2.7% of GDP.
The latest forecasts show the deficit falling to £183bn, or 7.9% this year, and to 1.7% in 2025-26.
The OBR said: “The improvement in the fiscal outlook is sufficient to enable the chancellor to meet his fiscal target of getting underlying debt falling as a share of GDP by the third year of our forecast.”