Preparing the pitch

In our Autumn Statement preview slidepack, we assess the economic outlook ahead of Jeremy Hunt’s Autumn Statement on November 22nd, and explore the policy choices facing the Chancellor as inflation drives up tax revenues, and interest rates drive up the cost of government debt.

We find that the Chancellor is in difficult terrain: although the economy has proved more resilient than expected this year, growth is now slowing and recession risks are high.

Given this difficult economic backdrop, forecast judgements taken by the OBR will take on extra significance as the Chancellor looks to prepare the ground for a likely election next year. Prospects for those forecasts will be decided by two forces. The first is higher-than-expected inflation. This has boosted tax revenues, which have been £15 billion higher than expected so far this year. But, set against those higher receipts, is a rise in interest rates which will drive up government borrowing costs by around £16 billion in 2027-28. We expect the OBR forecast to show that the ‘headroom’ against the government’s fiscal rules has increased with the impact of higher tax revenues outweighing the effect of higher interest rates.

But this doesn’t mean the Chancellor has room for giveaways. Any extra policy space will be a ‘fiscal illusion’. Government spending power has fallen along with everyone else’s. But with spending plans set in cash terms, the government has not faced up to that. Spending for unprotected departments is on track to take a 16% hit in real terms over the next five years, which would mean austerity-level cuts being implemented at a similar pace to those overseen by George Osborne in the early 2010s. Correcting these unrealistic spending plans, along with recognising likely future tax cuts, would more than wipe out any room created by higher tax receipts.

One particularly big decision the Chancellor must not duck is to uprate working benefits in line with inflation come April. Freezing working-age benefits next April would save the Treasury up to £4.2bn, but push an additional 400,000 children into poverty.