The Election Budget

In this slide pack we preview the upcoming Budget, assessing the economic and fiscal outlook ahead of what will be a key pre-election economic-policy event. We focus on the scope for cutting taxes, and the implications of different policy choices, putting the Chancellor’s upcoming decisions in a broader context.

We find that, despite near-term bad news on the economy, lower interest rates are likely to increase the Chancellor’s room for manoeuvre. Our updated projections suggest that headroom against the Government’s fiscal targets is likely to increase by around £10 billion to £23 billion, somewhat below historical norms.

With an election coming this year, the Government has hinted heavily that the bulk of it will be spent on tax cuts. The early Budget means that the 5p increase to fuel duty planned for 23rd March can be scrapped at a cost of £2 billion next year. Personal tax cuts also look likely, however. Cutting the basic rate of Income Tax by 1p or cancelling the Personal Allowance freeze in 2024-25 would both cost £7 billion each. A cheaper option would be cutting employee National Insurance again by 1p, at a cost of £5 billion. Other options include raising the Child Benefit withdrawal threshold from £50,000 to £70,000 (costing £2 billion) or abolishing it altogether (costing £4 billion). Cutting the basic rate of Income Tax by 1p while maintaining the personal allowance freeze next year would mean anyone earning less than £38,000 would see their personal tax bills rise rather than fall.

But pre-election tax cuts will be sandwiched between tax increases that have already happened and those already scheduled for after the election. Tax rises of around £20 billion were introduced in 2023-24, including freezing personal tax thresholds and increasing Corporation Tax. And a further £17 billion of tax rises set to come into effect in the next Parliament, including a Spring 2025 Stamp Duty rise and three extra years of tax threshold freezes.

But it is likely that more tax rises are to come after an election. Tax rises are often announced shortly after elections and the idea that fresh tax cuts are affordable rests on undeliverable spending plans that imply require real per-capita spending cuts of around 18 per cent for unprotected departments like the home office, justice and local government by 2028-29.