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Jeremy Hunt sought to present an optimistic vision of UK growth as he announced various measures to “turbo-charge” the economy, but forecasts were cut sharply on Wednesday amid high inflation and interest rates.
The chancellor announced a significant reduction in national insurance contributions, a permanent tax break for business investment and a package of welfare proposals designed to increase labour market participation.
However, the economic outlook was revised down, on the Office for Budget Responsibility’s expectation that inflation will be higher over the next two years. However, the fiscal outlook has brightened on the back of higher nominal gross domestic product and wage growth.
Taxation
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National insurance A 2p cut in the main rate of employee contributions, worth £10.4bn by 2027-28.
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Full expensing A permanent 100 per cent capital allowance for qualifying business investment, costing £9.1bn by 2027-28.
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Welfare and benefits Package of reforms designed to increase labour market participation, alongside an uplift in local housing allowances.
Bleaker economic forecasts
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Living standards Real household disposable income per person forecast to be 3.5 per cent lower in 2024-25 than pre-pandemic levels, the largest reduction in real living standards since ONS records began in the 1950s.
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Economic growth Forecasts were revised down for the next four years compared with those made in March. The economy is now expected to grow by 0.7 per cent in 2024, less than half the 1.8 per cent forecast in March.
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Inflation The OBR expects this to remain “higher for longer”, revising price growth to 3.6 per cent next year from 0.9 per cent forecast in March.
Fiscal outlook
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Departmental spending A real value fall of £19.1bn by 2027-28, as budget allocations did not rise in line with inflation.
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Chancellor’s ‘fiscal rules’ The chancellor’s tax and spending decisions are constrained by targets, including debt falling in the fifth year of a five-year forecast period and borrowing being below 3 per cent of GDP in the fifth year. The OBR predicts these will be met with borrowing at 1.1 per cent of GDP by 2028-29 and underlying debt marginally falling to 92.8 per cent of GDP.