Budget day beckons

By Perry Miller

In case you hadn’t heard, it’s the Budget tomorrow. With something of the flavour of Groundhog Day about it, this will be the third in a series of set piece fiscal policy events to land in the past six months. Kwasi Kwarteng’s eye-watering and ill-fated ‘mini-budget’ was launched on an unsuspecting nation last September, while Jeremy Hunt’s similarly eye-watering (but for entirely different reasons) Autumn Statement was delivered in November. 

This time, it will be the Chancellor’s first Budget. Talking to the BBC over the weekend, he billed it as a ‘back to work’ budget. Sadly, not an indication that the swathe of public sector strikes is about to end (that would be a real rabbit to pull from his hat) but more an admission that, if migration is no longer permitted to fill the more than one million vacancies in the economy, then we need to encourage the economically inactive back to work. Lee Anderson might put it somewhat differently.

The last couple of weeks have, arguably, been good ones for the Conservatives. Hard on the heels of Rishi Sunak’s successful deal on Northern Ireland has been the party’s focus on immigration, aka ‘Stop the Boats’. According to recent polling, this has tapped into the mood of the nation and the Lineker debacle over the weekend will have done the government no harm either. If Hunt can present a ‘steady as she goes’ approach tomorrow that marries fiscal rectitude for the markets with cost-of-living support for ‘hard-working families’, while at the same time applying a firm but fair hand to those who choose not to work, he could restore some faith in the Tories’ ability to run a sound economy. That could provide the momentum needed to drive a shift in the polls which currently have Labour riding high on 50%, 28 points ahead of the Conservatives.

His prospects look good. Thanks in the main to less support being needed for energy bills, government borrowing is currently £30 billion lower this financial year than was forecast and tax receipts have been good too, driven by inflation. This provides some room for short-term manoeuvring, but don’t expect income tax cuts anytime soon: in the words of the Chancellor ‘the best tax cut right now is a cut in inflation.’

So, what to look out for?

Energy bills. Some of the spare cash will likely be spent on maintaining the current level of support for households for another three months, thereby preventing average annual energy bills from rising from £2,500 to £3,000. By June, the dramatic drop in wholesale energy prices that has taken root in recent months should start to feed through into the energy price cap, allowing the Chancellor to end government support entirely.

Fuel duty. This has been frozen since 2011. Hunt could restore the 5p per litre cut from last year but that seems unlikely, with an eye both on inflation and the cost of living.

Corporation tax. This is Hunt’s biggest pain point with some on his own backbenches. The expectation is that the rate will rise from 19% to 25%, which would still be the lowest in the G7 economy. It’s a big revenue earner that will please the markets – yet some Tories will argue that it acts as a brake on long-term growth. Look out for tax breaks on capital spending to balance this out.

Public sector pay. Junior doctors are on strike this week, seeking a 26% pay rise to cover what they claim is a real terms loss of income since 2008-9. Steve Barclay, Health Secretary, estimated it would cost £2 billion to meet this demand. We don’t expect any of the various pay demands to be met in full tomorrow, but the government needs to get a grip on the scale of discontent and we expect a nod in that direction – with the potential for one-off payments. Jeremy Hunt can afford to stop asserting (erroneously) that paying public sector workers more will stoke inflation.

Back to work. Hunt is understood to be planning a carrot and stick approach here, depending on your motive for not working. Childcare issues? For those on Universal Credit, costs could be paid up front, rather than in arrears, with more support available. Early retirement? The over 50s can look forward to revamped skills training and an increase in pension allowances, while the raising of the state retirement age to 68 could also be brought forward far more quickly than expected. Long-term sick or disabled? There will be opportunities to ‘try work’ without losing benefits. At the same time, the Universal Credit sanction regime is likely to be tightened. As the Chancellor has said: ‘I believe in the virtue of work.’

In essence, it will be a budget for comfort and long-term confidence: ‘that’s what I’ll be talking about: how we can overcome problems to give hope to people for the future…We will do everything we can within the bounds of responsibility.’