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Chancellor spends forecast upside to leave finances largely unchanged

Author: ICAEW Insights

Published: 17 Mar 2023

Jeremy Hunt limits his tax and spending ambitions in the Spring Budget to stay within a very tight fiscal rule.

The Spring Budget 2023 for the government’s financial year of 1 April 2023 to 31 March 2024 was presented by the Chancellor of the Exchequer to Parliament on Wednesday 15 March 2023, accompanied by medium-term economic and fiscal forecasts from the Office for Budget Responsibility (OBR) covering the period up to 2027/28.

The fiscal numbers in the Budget are based on the National Accounts prepared in accordance with statistical standards. They differ in material respects from the financial performance and position that will eventually be reported in the Whole of Government Accounts prepared in accordance with International Financial Reporting Standards (IFRS).

A (slightly) lower fiscal deficit in 2023/24

Table 1 shows the Spring Budget estimate for the deficit in 2023/24 is £132bn, £8bn lower than the £140bn forecast in November 2022. Positive revisions to the forecast added £27bn to the bottom line, before £19bn from tax and spending decisions made by the Chancellor.

Table 1 – Changes in the OBR forecast for the fiscal deficit

 PSNB 2022/23
2023/24 (£bn)
2024/25 (£bn) 2025/26 (£bn)   2024/27 (£bn)  2024/28 (£bn)
 Forecast revisions  25  27  18  19  29  28
 Policy decisions  -  (19)  (19)  (19)  (12)  (8)
 Net change  25  8  (1)  -  17  20
 Nov 2022 forecast  (177)  (140)  (84)  (77)  (80)  (69)
 Mar 2023 forecast  (152)  (132)  (85)  (77) (63)   (49)

Forecast revisions in 2023/24 comprised £13bn in lower debt interest, £7bn less in energy support and £8bn in higher tax receipts, less £1bn other changes. The cost of tax and spending decisions in 2023/24 was estimated to be £8bn in lower corporation tax receipts from the full expensing of capital expenditure, £5bn from freezing fuel duties, £5bn from extending the energy price guarantee and other energy support measures, £2bn more for defence and security and £2bn from other decisions, less £3bn in indirect effects of those policy decisions on tax receipts and welfare spending.

Total receipts in 2023/24 are now expected to be £1,057bn (£2bn higher than previously forecast) and total managed expenditure is now anticipated to be £1,189bn (£10bn lower).

The forecast for the deficit in 2024/25 was up £1bn at £85bn and was unchanged in 2025/26 at £77bn, with upward revisions of £18bn and £19bn respectively offset by an estimated £19bn net cost of tax and spending decisions. The latter includes £3bn in 2024/25 and £4bn in 2025/26 for expanded childcare eligibility.

The final two years of the forecast were better by £17bn in 2026/27 (down to a fiscal deficit of £63bn) and by £20bn in 2027/28 (down to £49bn), although several commentators have pointed out this is on the basis of unrealistic spending assumptions that do not take account of significant pressures on public services.

In addition to forecasts for the next five years, the OBR also revised its estimate for the deficit in the current financial year ending 31 March 2023 to £152bn, £25bn lower than November’s estimate of £177bn. This is £53bn more than the OBR’s March 2022 estimate of £99bn and £69bn more than the November 2021 Budget estimate of £83m.

Table 2 provides a breakdown of the forecast changes by year, showing how lower debt interest and higher tax receipts flowing through the forecast period have provided the Chancellor with capacity to extend energy support, incentivise business investment, freeze fuel duty for yet another year (and extend the temporary 5p cut) and increase spending in specific areas.

Table 2 – Forecast revisions and policy decisions

 PSNB  2022/23 (£bn)

 2023/24 (£bn)  2024/25 (£bn) 2025/26 (£bn)   2026/27 (£bn)  2027/28 (£bn)
 Energy prices  14  7  -  -  -  -
 Debt interest  6  13  8  2  9  8
 Tax receipts  5  8  18  25  27  26
 Other changes  -  (1)  (8)  (8)  (7)  (6)
 Forecast revisions  25  27  18  19  29  28
 Capital allowances  (1)  (8)  (11)  (9)  (2)  2
 Fuel duty  -  (5)  (3)  (3)  (3)  (3)
 Energy support  -  (5)  -  -  -  -
 Childcare  -  -  (3)  (4)  (5)  (5)
 Defence  -  (2)  (3)  (2)  (2)  (2)
 Other decisions  (1)  (2)  (1)  (3)  (2)  (1)
 Direct effects  -  (22)  (21)  (21)  (14)  (9)
 Indirect effects  -  3  2  2  2  1
 Policy decisions  -  (19)  (19)  (19)  (12)  (8)
 Net change  25  8  (1)  -  17  20

Receipts and expenditure development

As illustrated by Table 3, receipts are expected to rise from £1,020bn in the current financial year to £1,231bn in 2027/28, while expenditure excluding energy support and interest is expected to rise from £968bn in 2022/23 to £1,121bn in 2027/28.. 

Interest costs are expected to fall from £115bn this year to £77bn in 2025/26 as interest rates and inflation moderate, before rising to £97bn in 2027/28 based on a growing level of debt.

Net investment is expected to increase in 2023/24 as an £8bn one-off credit from changes in student loan terms in 2022/23 reverses, before declining gradually as capital expenditure budgets flatline and depreciation grows. Public sector gross investment is planned to be £134bn, £134bn, £133bn, £132bn and £132bn over the five years to 2027/28, in effect a cut in real terms over the forecast period.

Table 3 – March 2023 OBR forecast

   2022/23 (£bn)

 2023/24 (£bn)  2024/25 (£bn)  2025/26 (£bn) 2026/27 (£bn) 2027/28 (£bn) 
Receipts   1,020  1,057  1,104  1,137  1,184  1,231
 Expenditure  (968)  (1,015)  (1,040)  (1,068)  (1,093)  (1,121)
 Energy support  (30)  (5)  -  -  -  -
 Debt interest  (115)  (95) (78)   (77)  (89)  (97)
 Current deficit  (93)  (58)   (14)  (8)  2  13
 Net investment  (59)  (74)  (71)  (69)  (65)  (62)
 Forecast deficit  (152)  (132)  (85)  (77)  (63)  (49)
 as % of GDP  6.1%  5.1%  3.2%  2.8%  2.2%  1.7%

The government’s secondary fiscal target is to keep the fiscal deficit below 3% of GDP by the end of the forecast period. Based on the March 2023 forecasts, it has headroom of 1.3% of GDP, or £39bn, against this target.

Table 4 provides a summary of the year-on-year changes in receipts and spending, together with the forecast for the increase in the size of the economy, including inflation. This highlights how tax and other receipts are expected to increase faster than the overall rate of growth in the overall size of the economy, while the government plans to constrain the average rise in expenditure excluding energy support and interest to 3.0% including inflation.

The former is principally a result of ‘fiscal drag’ as tax allowances are frozen, bringing in proportionately more in tax as incomes rise with inflation. The latter reflects what is generally considered to be unrealistic plans to constrain public spending in the context of an expected 9% rise in the number of pensioners over the five-year period (that will add to pensions, welfare, health and social care spending), pressure on public sector pay and the deteriorating quality of public services.

Table 4 – Year-on-year changes in receipts and spending

   2023/24 (%)

 2024/25 (%) 2025/26 (%)  2026/27 (%)   2027/28 (%) Average (%) 
 Receipts  +3.6%  +4.4%  +3.0%  +4.1%  +4.0%  +3.8%
 Expenditure  +4.9%  +2.5%  +2.7%  +2.3%  +2.6%  +3.0%
 Energy support  -83.3%  -100.0%  -  -  -  -100.0%
 Interest  -17.4%  -17.9%  -1.3%  +15.6%  +9.0%  -3.3%
 Net investment  +10.4%  -4.1% -2.8%   -5.8%  -4.6%  -1.5%
 Nominal GDP growth  +2.7%  +3.7%  +3.4%  +3.3%  +3.3%  +3.3%

Average nominal GDP growth over the five years of 3.3% combines average real-terms economic growth of 1.7% a year and inflation of 1.6%, the latter using the GDP deflator, a ‘whole economy’ measure of inflation. This is different to consumer price inflation, which is forecast to fall to 4.1% in 2023/24 and average 1.4% over the five years to 2027/28. 

Public sector net debt

Lower deficits over the forecast period translate into lower borrowing requirements, reducing forecasts for public sector net debt from just under £3.0trn to £2.9trn. This is partly increased or offset by changes in the forecasts for financial and other transactions and working capital movements.

Table 5 shows how forecast public sector net debt is now expected to reach £2,909bn by March 2028, £54bn less than was forecast in November. Although an improvement, debt at the end of the forecast period is expected to be £1,089bn higher than £1,820bn reported for March 2020 before the pandemic, reflecting the large amounts borrowed during the pandemic, in addition to borrowing planned over the next five years. 

 Table 5 - Changes in the OBR forecast for public sector net debt

 PSND  Mar 2023 (£bn)

 Mar 2024 (£bn)  Mar 2025 (£bn)  Mar 2026 (£bn) Mar 2027 (£bn)   Mar 2028 (£bn)
 Cumulative deficit  25  33  32  32  49  69
 Financial transactions  -  17  11  1  (8)  (15)
 Net change  25  50  43  33  41  54
 Nov 2022 forecast  (2,571)  (2,752)  (2,825)  (2,809)  (2,871)  (2,963)
 Mar 2023 forecast  (2,546)  (2,702)  (2,782)  (2,776)  (2,830)  (2,909)
 as % of GDP  100.6%  103.1%  102.4%  99.1%  97.6%  96.9%
 Underlying debt  (2,250)  (2,421)  (2,545)  (2,649)  (2,750)  (2,840)
 as % of GDP  88.9%  92.4%  93.7%  94.6%  94.8%  94.6%

The government’s primary fiscal target is based on ‘underlying debt’, a non-generally accepted statistical practice measure that excludes the Bank of England and hence quantitative easing balances. Underlying debt needs to be falling as a proportion of GDP between the fourth and fifth year of the forecast period. 

The forecast gives the Chancellor just £6.5bn in headroom against this target, with underlying debt / GDP expected to fall from 94.8% to 94.6% between March 2027 and March 2028.

Fiscal rules limit ambitions for tax and spending

Following the disastrous ‘mini-Budget’ of his predecessor Kwasi Kwarteng, the Chancellor’s principal goal has been to stabilise the public finances to provide confidence to debt markets. To do this he has prioritised meeting his fiscal rules over incentivising business investment, cutting taxes and increasing defence spending. He has also adopted what are generally considered to be unrealistic assumptions about public spending in the later years of the forecast to keep within his self-imposed fiscal rules.

This has led to the Chancellor announcing ‘ambitions’ to extend the full expensing of capital expenditure beyond three years and to increase defence and security spending to 2.5% of GDP, as well as continuing to plan for increases in fuel duties each year despite the repeated practice of cancelling these rises. 

Because these are ambitions and not plans, they are not incorporated into the forecasts enabling fiscal targets to be met. The OBR reports that continuing to cancel fuel duty rises each year would reduce the headroom to just £2.8bn, while converting the Chancellor’s ambitions to extend full expensing beyond three years and to increase defence spending to 2.5% of GDP into formal plans would cause him to breach his primary fiscal rule.


The overall fiscal position remains weak, with public finances vulnerable to potential economic shocks.

The Chancellor has followed the practice of many of his predecessors in increasing planned borrowing when fiscal forecasts worsen, as occurred in November 2022, only to then use upsides from improvements in subsequent forecasts to fund new tax and spending commitments. This ratchets up borrowing and debt as forecasts fluctuate and creates instability in both tax policy and public spending plans.

The consequence is a relatively unchanged fiscal position for the financial year commencing 1 April 2023 and the two subsequent financial years, as tax and spending decisions offset forecast upsides. And although there is an anticipated improvement in the projected fiscal position in the final two years of the OBR’s five-year forecast (after the next general election), the likelihood is that it will be offset in due course by the reality of pressures on public service and welfare budgets.

There is a reason why the first Budget following a general election typically sees taxes rise and the Spring Budget 2023 suggests that this pattern is likely to be repeated, irrespective of whichever party wins power.

Read more about the Spring Budget 2023.

Spring Budget 2023

On 15 March 2023, Chancellor Jeremy Hunt delivered the Spring Budget. Read ICAEW's analysis and reaction.

London Westminster

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