Key Takeaways
- Despite the current cyclical strength of the UK economy, the government has inherited a very difficult fiscal outlook.
The binding constraint imposed by the current fiscal rules is the requirement for debt to fall in five years. Labour does not currently know by how much it is missing this rule, but it’s probably by around £30 billion.
- Labour hopes that its supply-side focussed strategy will help to boost potential growth and ease fiscal constraints. But it is far too soon for growth measures to help in this budget. In fact, the government may have to deal with a downward revision in the OBR’s forecast for potential growth.
- The government is likely to tweak the way in which monetary operations interact with the fiscal rules to reduce the impact of Bank of England losses on the public finances. We expect a limited market reaction.
But the budget is also likely to involve several significant tax increases. Having ruled out increases to the rate of income tax, national insurance, VAT and corporation tax, Labour has severely narrowed its space for manoeuvre. As such, the government is likely to increase a number of smaller taxes, including via closing exceptions.
- An increase in capital gains tax and reductions in relief on pension contributions are likely, while an increase in employers’ national insurance is also possible.
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