Budget Speculation

Ahead of Wednesday’s Budget, the Resolution Foundation has published a briefing note considering the likelihood, and implications, of a downward revision to the OBR’s forecast. It looks at what all this means for the Chancellor’s fiscal target and priorities, in particular the affordability of pledges to cut income tax.

The briefing note - Time for Revision - finds that:

- On the basis of previous forecast changes, there is a two-in-five chance that the government’s target of a Budget surplus by 2019-20 will be broken as a result of downward revisions in the OBR’s forecasts.

- The Chancellor has announced an intention to present further cuts, equivalent to 50p for every £100 of government spending (or roughly £4 billion), but it is not clear whether these will fully offset any deterioration in the forecasts.

- The Chancellor’s position will be made tougher still by unfunded pledges to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of the parliament. The cost of these tax cuts will be £2bn next year, £5bn by 2019-20 and £7bn by 2020-21 – dwarfing the revenue raised by the £4bn additional cuts.

- These tax cuts are also highly regressive, with 85 per cent of the windfall going to the richest half of households and one-third going to the top ten per cent.

The Foundation says that now is not the right time to prioritise expensive and poorly targeted tax cuts. The government should instead focus support on those on low-to-middle incomes.

Matt Whittaker, Chief Economist at the Resolution Foundation said: “The fiscal windfall that accompanied the last Autumn Statement enabled the Chancellor to reverse tax credit cuts in the short-term, ease the expected pace of departmental spending cuts and still meet his central target of eliminating the deficit by 2020.

“But a subsequent deterioration in both the UK and global economic outlook looks set to erode much of last Autumn’s windfall. There is a two-in-five chance of the Chancellor missing his target without further action, hence the talk of deeper spending cuts on Wednesday.

“This already challenging fiscal target will be made tougher still if the Chancellor chooses to prioritse tax cut pledges for higher income households, the cost of which will rise to £7bn by the end of the parliament. These expensive and poorly targeted tax cuts should not be a priority when other areas of public spending are being scaled back.”