Chancellor George Osborne backed down on tax credit cuts and didn’t cut police funding in light of the Office for Budget Responsibility concluding that public finances are looking £27bn better off over the next five years.
The Capital Economics report read: “The Chancellor’s surprise windfall from the Office for Budget Responsibility allowed him to do everything he wanted in last week’s Spending Review and Autumn Statement – and more.
“Indeed, it is rather peculiar how fiscal policy is being driven by the OBR’s spreadsheet changes. But the Chancellor should be wary – what the OBR gives with one hand in a forecasting round, it can just as easily take away with the other in the next.”
The report suggested forecasts may be too favourable because they are based on gilt yields staying low. If yields were 1% higher than the OBR predicted the government would have to pay £4.5bn morel by 2020.
Capital Economics also poured scorn on whether the Chancellor’s housing market changes will have a positive impact on the market.
The report added: “We doubt that the housing market was improved much by all the measures announced last week.
“The Chancellor trumpeted building 400,000 new affordable houses over the forecast period. But, 200,000 of these homes were announced in his ‘productivity plan’ published alongside the July budget.
“What’s more, most of the spending to achieve this amounts to subsidies which may just boost housing demand and be capitalised into prices. The announcements do little to get at the heart of the housing supply problem, with some of the issues being a lack of suitable land, restrictive planning regulations and house building skill shortages.
“Indeed, the OBR didn’t appear impressed with the announcements and actually revised down their residential investment forecasts. This was because they revised up the negative impact that downrating of social rents will have on house building in the social sector. In fact, this has been the only recent housing measure to impact the OBR housebuilding forecasts and it was in a negative way.”
