The autumn budget looks set to be a cautious affair. It is not expected to spark the kind of Labour party enthusiasm that Andy Burnham has enjoyed in his first three months as prime minister.
In that short time, Burnham has promised not to shy away from tackling the big issues facing the UK, such as social care, weak economic growth and the effects of Brexit. He says he also wants to offer immediate and tangible help to those who are struggling with the cost of living.
But it is not clear how much help his chancellor John Healey can afford to offer. And much of what he can afford will end up being paid for by cuts to spending elsewhere, because the overall economic picture in the UK is so mixed.
The country’s growth forecast, for example, was recently raised by the IMF slightly to 1.3% for next year. This is better than for most G7 countries, but still weak by historic standards.
And the IMF is also predicting higher inflation in the UK, which could lead the Bank of England to raise interest rates, slowing growth.
With the UK being an export-led economy, weak growth in the EU (its largest trading partner by far) could dampen economic prospects, despite Burnham’s overtures to reset relations. Elsewhere, there is always a chance that the ongoing war between the US and Iran could cause more damage to the world economy.
The chancellor’s options are limited by competing pressures. How does he provide more help to voters, especially on energy bills, while avoiding increasing taxes that would damage business confidence and reduce growth prospects?
He has already ruled out any changes to capital gains taxes, which are currently taxed at a lower rate than income tax, on the grounds that it would inhibit investment and reduce economic growth.
As ever, looming over Healey’s decisions is the fear that the bond market would react negatively to any further increases in borrowing, with total government debt of £3 trillion, almost the size of the entire British economy. Interest rates on government bonds are already at record highs.
The bill for interest repayment for this financial year alone is already forecast to be twice the size of the defence budget.
That said, the IMF has praised the UK for having a credible plan to reduce its debt. The government’s fiscal rules are designed to bring spending and tax revenues into balance over three years. The chancellor will be extremely reluctant to sacrifice his credibility by any major changes to the fiscal rules that could lead to increases in the government’s debt.
His “fiscal headroom” (the extra money the chancellor might be able to spend while still meeting his fiscal rules) has already been reduced by rising spending and weaker tax receipts.
Long grass
This leaves the government with a choice of either cutting spending or raising taxes to fund more help with the cost of living. For example, any subsidy for energy bills is likely to be limited to those on benefits and could be funded by cuts to the existing energy budget.
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Businesses have protested vigorously against any further tax increases, following the increase in companies’ national insurance payments introduced by former chancellor Rachel Reeves. And while Healey seems to be considering increased taxes on the highly profitable banking sector, he may frame this as a down payment on increases to defence spending.
The biggest long-term challenges facing the chancellor are how to fund social care, how to manage the redistribution of tax revenues to the devolved regions, and how to fund a major increase in the defence budget – the very issue that Healey resigned from his previous role as defence secretary over.
But it appears that all of these will be kicked into the long grass until next year’s government spending review. This will set out the government’s spending plans for the next three years running up to the next general election.
In the meantime, a steady-as-you-go budget will please the bond markets and industry. But it could fall short of reassuring the public that the government is really on their side.
Steve Schifferes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.