The Chancellor should take decisive steps in her Budget to put
the public finances in order and aim to double her level of
headroom, while focusing on reducing prices, poverty and
protecting payslips, the Resolution Foundation said today
(Tuesday).
The Foundation's Autumn Budget 2025 preview notes that the widely
anticipated downgrade to the UK's ‘trend' productivity growth –
effectively our economic ‘speed limit' – is likely to be large at
nearly 0.3 percentage points.
But with such productivity growth already very weak in the near
term, the hit to the public finances will be confined to the back
end of the forecast – with borrowing increased by around £14
billion in 2029-30 (the year that matters for the fiscal rules).
Higher debt interest costs are likely to add a further £6 billion
to borrowing, along with £7 billion of policy U-turns that have
taken place since last March.
But there is a good chance that other changes to the economic
outlook provide some relief for the Chancellor. Ironically, a
stronger outlook for pay could offset almost all the fiscal pain
from lower productivity and reduce borrowing by £13 billion.
Overall, changes in the economic outlook and policy U-turns are
likely to reduce the current £9.9 billion of headroom against the
Chancellor's ‘current borrowing' rule into a fiscal black hole of
around £4 billion.
The Chancellor shouldn't just fill this hole but aim to double
the level of headroom she has against her fiscal rules to £20
billion (or £15 billion at a minimum). This would send a clear
message to markets that she is serious about fixing the public
finances, which in turn should reduce medium-term borrowing costs
and make future fiscal events less fraught.
Further spending will also be required to support the
Government's wider agenda on poverty reduction and prices. Fully
scrapping the two-child limit on welfare support, the minimum
needed to ensure that child poverty falls over the Parliament,
would cost £3.5 billion. Moving social and net zero levies off
electricity bills (also costing £3.5 billion in 2029-30) would
reduce typical energy bills by £160 a year and reduce inflation
by 0.3 percentage points.
Doubling her fiscal headroom to £20 billion and allowing for cost
of living support would require £31 billion of fiscal
consolidation. And with the Spending Review agreed only this
summer, the scope for spending cuts is limited. A tough to
deliver real-terms freeze in departmental spending in 2029-30
would save £5 billion.
Tax rises of £26 billion are therefore likely to be needed, the
scale of which means that avoiding touching the three big taxes–
VAT, Income Tax and National Insurance (NI) – risks doing more
harm than good.
The Foundation says that now is not the time to raise VAT as it
will fuel the UK's high inflation problem. And with (employer) NI
the focus of last year's Budget, the Chancellor should turn this
time to Income Tax. Offsetting a 2p rise in Income Tax with a 2p
cut in employee National Insurance would raise £6 billion overall
whilst protecting workers from these tax rises.
The Foundation says that the rest of the fiscal consolidation can
be completed with sensible reforms. These should include:
levelling the playing field on tax – such as an equivalent of
employer NI for at least some partnership income, raising
dividend tax and closing Capital Gains Tax loopholes (up to £7
billion); boosting growth – such as reducing the VAT threshold
(£2 billion); and future-proofing the tax system – such as
reforming Vehicle Excise Duty (£2 billion).
Extending the freeze in personal tax thresholds for two more
years beyond April 2028 would also raise £7.5 billion and would
be reasonable, given the low rates of tax paid by average
employees relative to other countries.
James , Research Director at the Resolution
Foundation, said:
“Budget-watchers are braced for a major downgrade to Britain's
productivity outlook. But ironically, a major upgrade to the
outlook for pay could mean that the Chancellor's fiscal black
hole is less daunting than feared.
“However, reassuring the markets about the state of the public
finances, paying for policy U-turns and providing fresh cost of
living support won't come cheap. Tax rises of £26 billion are
likely to be needed.
“The Chancellor should look to make sensible tax reforms to car
taxes, dividends and capital gains. Switching 2p of employee
National Insurance onto Income Tax would raise £6 billion while
protecting workers' wages. Together, this will help to deliver a
decisive Budget centred around prices, payslips and poverty
reduction, and that shifts the focus away from black holes and
back onto boosting growth.”
