Chancellor should prioritise prices, payslips and poverty reduction at the Budget

The Chancellor should take decisive steps in her Budget to put the public finances in order and aim to double her level of headroom, while focusing on reducing prices, poverty and protecting payslips, the Resolution Foundation said today (Tuesday).

The Foundation’s Autumn Budget 2025 preview notes that the widely anticipated downgrade to the UK’s ‘trend’ productivity growth – effectively our economic ‘speed limit’ – is likely to be large at nearly 0.3 percentage points.

But with such productivity growth already very weak in the near term, the hit to the public finances will be confined to the back end of the forecast – with borrowing increased by around £14 billion in 2029-30 (the year that matters for the fiscal rules). Higher debt interest costs are likely to add a further £6 billion to borrowing, along with £7 billion of policy U-turns that have taken place since last March.

But there is a good chance that other changes to the economic outlook provide some relief for the Chancellor. Ironically, a stronger outlook for pay could offset almost all the fiscal pain from lower productivity and reduce borrowing by £13 billion. Overall, changes in the economic outlook and policy U-turns are likely to reduce the current £9.9 billion of headroom against the Chancellor’s ‘current borrowing’ rule into a fiscal black hole of around £4 billion.

The Chancellor shouldn’t just fill this hole but aim to double the level of headroom she has against her fiscal rules to £20 billion (or £15 billion at a minimum). This would send a clear message to markets that she is serious about fixing the public finances, which in turn should reduce medium-term borrowing costs and make future fiscal events less fraught.

Further spending will also be required to support the Government’s wider agenda on poverty reduction and prices. Fully scrapping the two-child limit on welfare support, the minimum needed to ensure that child poverty falls over the Parliament, would cost £3.5 billion. Moving social and net zero levies off electricity bills (also costing £3.5 billion in 2029-30) would reduce typical energy bills by £160 a year and reduce inflation by 0.3 percentage points.

Doubling her fiscal headroom to £20 billion and allowing for cost of living support would require £31 billion of fiscal consolidation. And with the Spending Review agreed only this summer, the scope for spending cuts is limited. A tough to deliver real-terms freeze in departmental spending in 2029-30 would save £5 billion.

Tax rises of £26 billion are therefore likely to be needed, the scale of which means that avoiding touching the three big taxes– VAT, Income Tax and National Insurance (NI) – risks doing more harm than good.

The Foundation says that now is not the time to raise VAT as it will fuel the UK’s high inflation problem. And with (employer) NI the focus of last year’s Budget, the Chancellor should turn this time to Income Tax. Offsetting a 2p rise in Income Tax with a 2p cut in employee National Insurance would raise £6 billion overall whilst protecting workers from these tax rises.

The Foundation says that the rest of the fiscal consolidation can be completed with sensible reforms. These should include: levelling the playing field on tax – such as an equivalent of employer NI for at least some partnership income, raising dividend tax and closing Capital Gains Tax loopholes (up to £7 billion); boosting growth – such as reducing the VAT threshold (£2 billion); and future-proofing the tax system – such as reforming Vehicle Excise Duty (£2 billion).

Extending the freeze in personal tax thresholds for two more years beyond April 2028 would also raise £7.5 billion and would be reasonable, given the low rates of tax paid by average employees relative to other countries.

James Smith, Research Director at the Resolution Foundation, said:

“Budget-watchers are braced for a major downgrade to Britain’s productivity outlook. But ironically, a major upgrade to the outlook for pay could mean that the Chancellor’s fiscal black hole is less daunting than feared.

“However, reassuring the markets about the state of the public finances, paying for policy U-turns and providing fresh cost of living support won’t come cheap. Tax rises of £26 billion are likely to be needed.

“The Chancellor should look to make sensible tax reforms to car taxes, dividends and capital gains. Switching 2p of employee National Insurance onto Income Tax would raise £6 billion while protecting workers’ wages. Together, this will help to deliver a decisive Budget centred around prices, payslips and poverty reduction, and that shifts the focus away from black holes and back onto boosting growth.”