Chancellor needs to take action to balance the books – but lower-income households shouldn’t bear the brunt

Higher interest rates, weaker growth and lower tax revenues mean that fresh fiscal tightening is likely to be needed on 26^th March for the Chancellor to meet her fiscal rules. But with the jobs market already in recession territory, she must avoid hitting the living standards of lower income families in the process, the Resolution Foundation said today (Monday).

Less than five months on from the Chancellor’s Autumn Budget, the UK’s economic outlook has deteriorated markedly. GDP is now expected to be around 1.2 per cent lower, CPI inflation 0.4 percentage points higher, and interest rates expectations 0.4 percentage points higher than the OBR expected at the time of the Autumn Budget. Most worryingly, the Foundation’s employment estimate (using ONS population and HMRC payroll data) suggests the number in work is falling at a pace consistent with a recession.

The Foundation estimates that this deterioration would lead the Office for Budget Responsibility to revise down its projection for the current balance from a surplus of £9.9 billion in 2029-30 to a deficit of around £5 billion. This means that without fresh policy action the Chancellor would be breaking her newly-legislated fiscal rules.

With recent market jitters highlighting the UK economy’s sensitivity to global volatility, the Foundation says the Chancellor must respond decisively with fresh fiscal consolidation by the 26^th March to reduce the risk of further damaging increases in cost of borrowing. In the past, governments in this position have made growth-sapping cuts to public investment. To the Government’s credit, the new fiscal framework means there is no incentive to do that this time.

Instead, cuts to public services, welfare, or tax rises are likely to be in train.

One option for the Chancellor is to trim the spending envelope ahead of the Spending Review. Reducing the annual real increase from 2026-27 to 2029-30 (inclusive) from 1.3 to 1.2 per cent would save £3 billion in 2029-30.

However, the Foundation cautions that with ‘unprotected’ departments already facing cuts of around £9.7 billion after next year, reductions risk further damaging front line services such as social care, the justice system and policing that are already under strain.

The Government is reportedly focusing on cutting incapacity and disability benefits to stem rising spending and support more people into work. But while the system needs reform, Ministers appear to be focused on cutting Personal Independence Payments (PIP) – a benefit that isn’t related to work.

The Foundation warns that cutting PIP by £5 billion in 2029-30, for example by raising the threshold to qualify for support, could see around 620,000 people losing £675 per month, on average. The Foundation adds that 70 per cent of these cuts would be concentrated on families in the poorest half of the income distribution.

Any changes to PIP and incapacity benefits must be handled very carefully, says the Foundation, so that the system is improved and able to support people back into work, rather than simply cause negative income shocks.

Instead, the Government should raise taxes to meet the fiscal rules. Extending the freeze in personal tax thresholds by a further two years to 2029-30 would raise around £8 billion. Crucially, this would not affect living standards in the short-term as the policy wouldn’t take effect until April 2028, while 80 per cent of extra revenue would come from families in the richest half of the income distribution.

James Smith, Research Director at the Resolution Foundation, said:

“The UK’s economic outlook has declined markedly since the Budget last Autumn. Weaker growth and higher interest rate expectations look set to turn the UK’s projected current surplus of £10 billion into a deficit of around £5 billion.

“The Chancellor must act decisively to meet her fiscal rules. But with the jobs market in recession territory, lower income households shouldn’t bear the brunt of any consolidation.

“Crucially, she should avoid turning the Spring Statement into a ‘sticking plaster’ Budget, with long-term thinking on welfare reform undermined by the quest for short-term savings that could cause real harm.

“And with Britain’s fiscal pressures more likely to intensify rather than fade away, continuing to rule out tax rises is going to make future Budgets even more challenging to deliver.”