Summary

• The Chancellor is facing a new financial hole of as much as £30 billion, which she will probably seek to fill with broad-based increases in taxes on income and from a dog’s breakfast of smaller measures.


• This Briefing explains how that gap has opened up and assesses the Chancellor’s options.


• The single largest part of the hole is likely to reflect a long overdue downgrade to the OBR’s forecasts for productivity. But the rest would result from policy decisions made by the current government.


• In particular, the Chancellor looks set to spend the savings from any more favourable economic assumptions made by the OBR, rather than bank them to reduce borrowing. She also looks set to take some poorly targeted measures to lower household bills.


• More positively, the Chancellor is likely to increase the fiscal headroom, which would provide a larger buffer against future shocks. Many of the tax increases would also be ‘backloaded’ towards the end of the forecast period, rather than take effect straightaway.


• Households and businesses are already expecting a painful Budget, so an easing of the current uncertainty might at least be a relief. A fall in the cost of borrowing could help, too.


• However, any attempt to raise most of the money from a large number of small tax changes is bound to backfire. In particular, the likely behavioural responses mean that the revenues raised would be much less reliable than those from a simpler increase in broad-based taxes, notably income tax or VAT.


• Above all, none of this would be necessary if the current and previous governments had not allowed public spending to spiral out of control.

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