Blowing the budget special

Top of the Charts

Morning all,

Apologies that TOTC is late – even later than I warned last week. If it’s any consolation I’m being punished by an involuntary couple of hours triathloning this morning, which us just what you want after a 24-hour stint number crunching the Chancellor’s massive statement yesterday. Hopefully I won’t sink quite as fast as the pound.

The ludicrous innovation of having a fiscal statement on a Friday has smashed TOTC’s delivery schedule, but it didn’t stop the RF team from pulling together a full-blown analysis of Kwasi’s blow-the-budget-non-Budget which we’ve just published. Thanks as always to the team for great analysis under severe time pressure, not just of who these tax cuts are for, but also of what it all means for the public finances (which is crucial given the absence of a fiscal forecast). To whet your appetite here’s our six-chart summary of how yesterday’s fiscal statement abruptly ended both Treasury orthodoxy and the BoJohnsonism era of politics. A brave new world of gambling on low-tax-driven growth lies ahead. Buckle up.

Enjoy your weekend,

Chief Executive
Resolution Foundation

The Chancellor has blown the budget

Yesterday the Chancellor decided to blow the budget on a £45 billion package of tax cuts, the biggest for 50 years. In doing so he rejected not just Treasury orthodoxy but also the legacy of Boris Johnson as a wholly new approach to economic policy was unveiled. Today’s Conservative Party is no longer fiscally conservative or courting the Red Wall, with debt on course to rise in each and every year and its focus shifting South where the main beneficiaries of these tax cuts live.Major tax cuts combine with an already large, and largely unavoidable, fiscal loosening driven by a weaker economy and the need to subsidise surging energy bills for families and firms. While the Chancellor unwisely did not allow the Office for Budget Responsibility to update its forecasts, we estimate that energy support and the weaker economic outlook will increase borrowing by £265 billion over the next five years compared to the OBR’s March forecast. Tax cuts of £146 billion over the same period raise that to £411 billion.

While extra borrowing is greatest this year (£130 billion) given the scale of energy bill support, the permanence of these tax cuts, combined with higher interest rates and weaker growth, mean that the £30 billion of headroom the previous Chancellor maintained against his fiscal rule of having debt falling as a share of GDP will have been blown through twice over by the middle of this decade. This constitutes the largest permanent loosening of fiscal policy on record (the deficit will increase by 2.3 percentage points of GDP, or £67 billion, in 2026-27 compared to expectations in March).

The Chancellor set out that debt falling remains his key metric for fiscal sustainability, but he did not outline how that would be achieved. Doing so by the middle of this decade would require spending cuts of £36 billion in 2026-27, assuming tax rises have been ruled out. This would be broadly equivalent to the total cut to public spending announced by George Osborne in his 2010 Budget.

From levelling up to stretching apart

The tax cuts confirmed yesterday are strongly focused on higher-income households, driven by the reversal of the rise in National Insurance, scrapping of the 45p rate of Income Tax, and associated Dividend Tax cuts. Next year they will see someone earning £200,000 gain £5,220 a year, rising to £55,220 for a £1 million earner. Those on £20,000 will gain just £157. The result is that almost half (47 per cent) of the gains will go to the richest 5 per cent of households, compared to 12 per cent for the entire poorer half of households. Moreover, those living in the South East or London will see over three-times (on average, £1,600) the gains of those in the North East, Wales or and Yorkshire (an average of £500). Red wall friendly it is not. The South is also where the main impact of a welcome cut to stamp duty will be felt: the tax bill on the sale of the average first-time buyer home in London will fall by £6,300, compared to no gain for the average first-time buyer in the North East.


This package of tax cuts largely reverses rises announced by Rishi Sunak in recent years, but not entirely with the four-year freeze to income tax thresholds remaining in place. The scale of that freeze in an era of high inflation means that the vast majority of earners will still see their taxes increased when all tax changes announced during this parliament are taken into account. Those earning under £155,000 will see their tax bill increase or be unaffected, with only those earning over £155,000 receiving a net tax cut thanks to the scrapping of the 45p tax rate. Workers earning between £63,000 and £125,000 lose the most (almost £1,500 in 2025-26). A similar pattern can be seen among households, even considering increases to benefit generosity as well: it is only the top 5 per cent seeing significant income gains from policy changes (averaging £2,520 by 2025-26). Despite the rhetoric, tax as a share of the economy remains at its highest sustained level since the 1940s (at around 35 per cent of GDP).

Growth will rise in the short term, but so too will interest rates

The Chancellor rightly identified raising the UK’s growth rate as a core objective for economic policy makers. In the short run the sheer scale of additional fiscal support to the economy will boost GDP, but while the Government has its foot on the accelerator, the Bank of England has its foot firmly on the brake given its view that demand in the UK economy currently outstrips supply. As a result, the Chancellor’s short-term boost to growth will be offset by further rate rises, leaving the level of GDP largely unaffected in the medium term. Ten-year gilt yields rose by around 25-30 basis points yesterday, with larger rises for shorter-term yields.As a result, any lasting impact of yesterday’s tax cut package rests not on its ability to boost demand in the short run, but in whether it contributes to permanently growing the economy’s supply potential. Gambling that it will do is the new central economic policy of the Government, and a key driver of the decision to scrap the rise in Corporation Tax (CT) from 19 to 25p planned for April 2023 (costing £18 billion). However, there are good reasons for being cautious about this will materially boost the economy. First, this change will leave the effective CT rate exactly where it has been during the low growth of the past decade that the Chancellor is seeking to turn around. Second, while in principle lower CT rates may boost growth by encouraging investment and innovation, in practice empirical studies find little evidence of a material impact on growth. There is little relationship between CT and investment levels across OECD countries.


Specific tax measures, including more ambitious Investment Zones, could contribute to growth, but crucial details about where they will be based and what regulatory changes they will involve remain unclear. More generally the level of growth, or depth of any recession, in the years ahead will be driven far more by the path of energy prices than the level of taxation – with countries opting for both higher (Germany) and lower (US) tax levels outgrowing the UK economy over the past 15 years.

The outlook for household living standards remains dire

As with growth, large tax cuts and support for energy bills will boost household incomes but leave them on course for a dreadful few years. Non-pensioner incomes are projected to fall by 8 per cent over the course of this year and next, significantly more than during the financial crisis (5 per cent between 2009-10 and 2011-12). Even assuming that benefits are increased by 10 per cent in cash terms next April (as per the usual uprating rules), the proportion of people living in absolute poverty is projected to rise between 2021-22 and 2023-24 from 17 to 20 per cent (equivalent to an extra 2.3 million people), with the proportion of children jumping from 23 to 28 per cent (an extra 700,000 children).

While lower-income households have seen their incomes relatively protected this year, they are on course for remarkably large income falls in 2023-24 (8 per cent) while only the top 5 per cent are projected to see income gains (2 per cent growth) thanks to the cuts to income taxes. Inflation outstripping wage growth drives these falls, while a slow recovery of living standards through to the middle of this decade also reflects rising unemployment (the Bank of England project a rise to 6.3 per cent) and rapidly rising mortgage costs. Incomes are projected to be lower in 2024-25 than 2019-20, making this comfortably the worst parliament on record for living standards growth.

Orthodox this is not

Rising energy costs, surging interest rates and the aftermath of the pandemic mean that the early 2020s were already set to be a perilous time for households and a challenging one for economic policy makers. That is the backdrop to the Government’s radical reshaping of economic policy yesterday, where it jettisoned fiscal conservatism to deliver the largest tax cuts in half a century. The Chancellor has set the UK economy on a new trajectory, one he hopes includes permanently higher growth but which will certainly involve far higher borrowing levels and costs. The degree of risk-taking is beyond that adopted by any Chancellor in generations. Orthodox it is not.