The Chancellor eases the fiscal belt in a low-key pre-election Budget

Yael Selfin, Chief Economist at KPMG UK

Yael Selfin, Chief Economist at KPMG UK

“The Chancellor eases the fiscal belt in a low-key pre-election Budget” says Yael Selfin, Chief Economist at KPMG UK.

“With productivity lagging behind some of the other developed economies, the UK needs greater investment in skills and infrastructure. While the current Budget went some way in encouraging stronger investment, its focus on personal taxes when the labour market is relatively tight, puts more weight on consumption which matters less for long-run growth and risks reigniting inflation. Although measures to increase the supply of labour, including through the tax system, a more efficient NHS, and increased threshold for child benefit are welcome.

“The new OBR forecast gave the Chancellor minimal room to act, with a headroom of £12 billion against his fiscal rule, of which he chose to use £3 billion. This has left a buffer of just £8.9 billion compared with a historical average of £26 billion.

“Moreover, the OBR’s economic outlook seems relatively optimistic, while it also overplays the fiscal room the Chancellor has, given its requirement to project the state of public finances based on current government spending plans.

“The Government’s plans for the overall spending envelope imply that funding on unprotected departments would have to fall by over 3% a year in real terms, which is unrealistic in the absence of sustained productivity growth. The majority of recent tax cuts may need to be reversed in the next Parliament in order to maintain an adequate provision of public services after the current Spending Review period.

“The cut in the main rate of National Insurance did not come as a surprise. While this was a more sensible measure compared with cuts to basic rate of income tax, as it is cheaper and targets people of working age in work, the frozen thresholds which push people into paying higher rates mean the net impact on pay packets is significantly less generous. Indeed, the overall tax burden is still set to rise to 37% of GDP, its highest level since 1948.”



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