IFS think-tank wonks, fans of redistribution and big government are having Burmese kittens about tax cut promises from Tory candidates. Other Tory candidates are brandishing their “realism”, which is code for defeatism.

The OBR’s latest economic and fiscal outlook estimates that for each 1% of higher nominal GDP, public borrowing in 2024/25 will be 0.8% lower. The Centre for Economics and Business Research (CEBR) forecast is that nominal GDP in 2024/25 will be 5.7% points higher than the OBR assumes. If they are right this alone generates £133 billion of net additional revenues. Against that needs to offset some likely higher spending.

The CEBR argues that

If we assume that public spending will be the same share of GDP as in the OBR projections, this increases the cost of public spending by £34 billion; higher inflation will raise indexed debt payments by about £7 billion while higher interest rates could raise debt payments by as much as £30 billion. Even allowing for all these, it is pretty clear that the OBR’s forecasting failures mean that substantial additional net revenues are likely to be generated compared with those expected. Which in turn means that net tax (after allowing for expenditure) receipts in 2024/25 will be about £60 billion more than the OBR’s base estimates.

Since these receipts will come from the effects of inflation and fiscal drag meaning that people will be paying more tax than they would have expected, it would not be unreasonable for the additional revenues to be used for tax cuts.

Economist Douglas McWilliams points out that since these receipts will come from the effects of inflation and fiscal drag meaning that people will be paying more tax than they would have expected, it would not be unreasonable for the additional revenues to be used for tax cuts. The £60 billion will cover the tax cuts being advocated by Liz Truss…

Ahead of Rishi’s Spring Forecast Statement due in two weeks, the Centre for Economics and Business Research has issued a chilling scenario analysis which calculates the likely knock on effect from Russian sanctions on global commodity prices and consequently UK inflation. They expect GDP growth this year will be halved – down from a previously forecast 4.2% in 2022 to 1.9%, with growth in 2023 reduced to zero. They calculate the reduction in GDP to cost more than £90 billion per annum…

Higher commodity prices will:

• Reduces the level of disposable income by 1.9% in 2022 and by 2.1% in 2023. As a result they estimate disposable incomes will fall in 2022 by 4.8%, with a further fall of 1.4% in 2023. The fall in 2022 is the largest since records started in 1955.
• The forecast fall in living standards this year is an estimated £71 billion – which amounts to £2,553 per household. The part of it due to invasion of Ukraine is about half – £35 billion (£1,259 per household) – with a further reduction from this source in 2023 of £29 billion (£1,043 per household).
• The combined effects of sanctions and slower world trade growth reduce export growth in 2022 by 2.1% and by 0.5% in 2023. Export growth was previously predicted to be 3.0% this year and 0.4% next so these combined impacts more or less wipe out the predicted export growth.
• Inflation by Q4 2022 is likely to be 4.1 percentage points higher than CEBR previously forecast. They now expect quarterly CPI inflation to hit 8.7% in Q2 and to remain above 7% until Q1 2023.
• The CEBR now expects the Bank of England to guide interest rates to 1.25% in 2024 rather than the previous forecast of 2%.

CEBR’s analysis was based on oil and other commodities being at lower prices than they actually are today. Rishi is going to be under pressure to put the economy on a semi-wartime setting in his spring statement…