The headroom bind

In this slide pack we preview the upcoming Spring Statement, assessing the economic and fiscal outlook ahead of this key economic-policy event. We focus on the news since the Autumn Budget and the implications of different policy choices, putting the Chancellor’s upcoming decisions in a broader context.

Summary

The outlook for the economy has deteriorated since the Autumn Budget:

• In the short term, GDP is 1.2% weaker than expected, and the pace of employment falls points to a recession
• Inflation has proved stickier, with consumer prices around 0.4% higher than expected at the start of the year.

This, combined with higher interest rates and weaker tax receipts, likely means headroom has been wiped out.

The Chancellor should act decisively to meet the rules given the risk of rising borrowing costs:

• This can be done by cutting spending on public services or welfare, or raising taxes
• The Government’s approach appears to be to make straightforward cuts to Personal Independence Payment (PIP), which is paid regardless of income, by around £5 billion in 2029-30
• History tells us that rushed savings exercises in this area rarely achieve desired savings. 70% of cuts would fall on the poorest half of families with very large income losses for those deemed ineligible.
• With cuts to ‘unprotected’ departmental budgets of £10 billion already planned, and pressures to spend more than 2.5% of national income on defence, further spending reductions would be tough to deliver
• Tax rises should not be ruled out – extending threshold freezes is a progressive way to raise revenues that is consistent with manifesto promises.

The Government should double down on efforts to increase growth by announcing new policy to boost business dynamism.