Borrowing boost means Chancellor’s Budget will deliver fresh cost-of-living support

… But he faces tough choices on resolving strikes, raising employment, and reforming tax

The Chancellor is set to receive a short-term borrowing boost in his Budget, some of which he will use to prevent a spike in energy bills and petrol prices next month. But in the face of a longer-term weak outlook he faces tough choices on how to resolve public sector strikes and boost Britain’s growth prospects, according to new Resolution Foundation research published today (Monday).

The Foundation’s pre-Budget research shows that lower-than-expected spending on energy support schemes and stronger tax receipts will contribute to borrowing coming in around £30 billion lower this year than the Office for Budget Responsibility’s forecast last November. The fall in growth forecast for 2023 is likely to be less than half that feared in the Autumn, partly reflecting an 80 per cent fall in wholesale energy costs.

The Chancellor will use some of this additional fiscal firepower to address imminent cost-of-living pressures. Extending the current £2,500 level of the Energy Price Guarantee for three months would avoid a 20 per cent increase in household energy bills from April, with a one-off cost of around £3 billion. Scrapping the planned 12p rise in Fuel Duty is more problematic, permanently costing up to £5 billion a year.

However, the Foundation cautions that Britain’s cost-of-living crisis is far from over. Typical working-age household disposable incomes are set to fall by 4 per cent (or £1,100) next year, as inflation continues to outpace pay growth.

The authors note that the UK’s medium-term economic outlook is far less uncertain, with the OBR having to make tricky judgements on whether stronger tax receipts or the shrinking of Britain’s workforce will continue in future years.

A markdown on labour market activity from the OBR (bringing it closer in line with Bank of England forecasts) could leave the Chancellor with little change in the headroom against the fiscal rules he announced last Autumn (at £15 billion), limiting any wriggle room to resolve public sector pay disputes, and boost growth via raising workforce participation and investment-spurring business tax reform.

Current public sector industrial disputes and high vacancy rates reflect the fact that, while private sector wages are still marginally above pre-pandemic levels, public sector wages are around 3.4 per cent lower.

Delivering a 5.5 per cent pay settlement, to make progress on closing the public-private sector pay gap and possibly resolve industrial disputes, would cost £5 billion more than the 3.5 per cent pay increase that departments say they can afford within current budgets.

The Chancellor is also under pressure to revisit plans for corporation tax, with April bringing the end of the ‘super deduction’ on firms’ investment and the start of a six percentage point rise in the headline corporation tax rate.

The Foundation notes that cancelling the planned rise in corporation tax, a key component of Trussonomics which Jeremy Hunt ‘uncancelled’ in his first act as Chancellor last October, would be costly (£12-16 billion) with little impact on growth.

A more growth-friendly alternative could be to allow firms to fully expense investment costs against their tax liabilities. This would also have significant upfront costs (£11 billion) but do more to raise investment in the long run.

Finally, the Foundation says the Chancellor’s focus on boosting workforce participation will see him considering policy options including:

1. Discouraging early retirements by increasing the age at which tax-relieved private pension wealth can be accessed.
2. Encouraging parents into work by introducing a Work Allowance in Universal Credit for second earners, costing £2.1 billion. Alternatively, the Chancellor could extend free childcare to 1- and 2- year olds. This would cost £3-6 billion and deliver an income boost to middle-and-higher income families, rather than an employment boost to lower-income families.
3. Supporting those with ill-health by stopping people from having an extra Work Capability Assessment (WCA) if they enter work, or taking the far more radical route of scrapping WCA altogether.

While boosting workforce participation will be tough, the Government can take encouragement from the UK’s past success. Between 1999 and 2019, participation rose by 22 percentage points for women aged 55-64, while the disability employment gap fell by 5 percentage points between 2013 and 2022.

Cara Pacitti, Senior Economist at the Resolution Foundation, said:

“The Chancellor will want his upcoming Budget to signal a new, lower inflation and higher growth, phase for the UK economy. And there has certainly been some good news with the economy expected to be bigger and borrowing lower this year than feared.

“But there is no escape from having to focus on the cost-of-living crisis that families are still living through. Jeremy Hunt is likely to act to prevent April’s spikes in energy bills and fuel duty.

“Looking further ahead, the Chancellor needs to end public sector pay disputes and wrestle with the UK’s stagnant economic growth, by focusing on encouraging more firms to invest, and people to work.”