Chancellor is set for £30bn Budget boost despite inflation threat

For all the storm clouds gathering over the economy, the backdrop to Rishi Sunak’s Budget next week is far brighter than feared a few months ago.

The easing of lockdown restrictions and the vaccine rollout mean the economy is in better shape than expected at the time of the last Budget in March.

Following the deepest recession for a century, the economy is now just 0.8 per cent smaller than before the pandemic, warnings over mass unemployment are unfounded, and a buoyant housing market and improved tax receipts have boosted the Treasury’s coffers.

Stronger growth: The Office for Budget Responsibility will hand the Chancellor (pictured) a set of forecasts more upbeat than those of seven months ago

As such, the Office for Budget Responsibility will hand the Chancellor a set of forecasts more upbeat than those of seven months ago, despite the looming threat of inflation.

In a major pre-Budget report published today, analysts at the EY Item Club say growth forecasts for this year will be revised up from 4 per cent to 7.6 per cent by the OBR. 

Less encouraging is the outlook for next year, with the outlook downgraded from 7.3 per cent to 6.5 per cent.

The Item Club also expects borrowing this year to be almost £30billion lower than the near £234billion forecast at £205billion.

Peter Arnold, at EY, said: ‘Prospects for the economy have been looking up over the summer.

‘August’s GDP rise left the economy only 0.8 per cent short of its pre-pandemic size and the deficit should fall quite rapidly.’

But despite the rosier outlook, the Chancellor is expected to be cautious as he looks to keep a tight rein on spending and balance government finances.

The public’s patience for further tax rises was severely tested last month when Boris Johnson announced the surprise national insurance hike to help the NHS and fund social care.

And while money is pouring into the health service, other departments such as justice and local government face another tough settlement in the spending review published alongside the Budget.

A poll by Ipsos Mori for Deloitte found 54 per cent of voters do not want higher government spending if it means higher taxes or more borrowing.

And overall support for higher public spending, even if that means increased taxation and borrowing, has fallen in the past year, from 33 per cent to 28 per cent. 

While 38 per cent of over 55s are happy with paying more tax and more borrowing to fund increased public spending, support falls to 24 per cent among the under 55s.

Charlotte Pickles, director at think tank Reform, said: ‘This polling gives credence to the Chancellor’s desire to contain public spending.

‘Despite repeated calls for further public sector cash injections, only a quarter of under 55-year-olds support the higher taxes and borrowing that would be required to pay for them.

‘With continuing pandemic costs and an ambitious domestic agenda, the Government has a hard task ahead to square that fiscal circle.’

Nevertheless one area the Chancellor will be keen to tackle and ease the burden for consumers is energy bills. Gas prices have hit record highs and are set to spike further this winter.

According to EY, Sunak could look to subsidise energy providers and reduce household bills. 

He could also reduce the 5 per cent VAT rate on fuel, or suspend the tax entirely. Arnold said: ‘The cost of living concerns are increasing. 

The Chancellor may look at what he can do to provide support for consumers and businesses, particularly on energy costs.’

With the COP26 meeting taking place in Glasgow soon, Sunak will also make pledges to further net zero targets.

This is likely to mean increased investment for green projects as well as incentives for electric heat pumps.

Ironically, these measures could actually mean less money for the Treasury’s coffers. Arnold said: ‘The Chancellor will need to grapple with some of the fiscal contradictions around any efforts to achieve these. Accelerating electric vehicle take-up will erode revenue from fuel and road duty.’

Another reason for Sunak’s likely caution is that inflation is again stalking the economy. For now, borrowing costs are close to record lows but Sunak is worried that servicing the UK debt pile could become much more expensive.

At the Budget in March, he pointed out a 1 per cent increase in interest rates and inflation would cost us over £25billion, adding: ‘Over the medium term, we cannot allow debt to keep rising, and, given how high our debt now is, we need to pay close attention to affordability.’

Caution is the name of the game.