Chancellor to tighten belt despite tax windfall

Despite the Chancellor receiving a windfall from the government’s fiscal watchdog raising its forecasts for the economy, he will not use the extra wriggle room renege on tax hikes at next week’s budget.

The Office for Budget Responsibility (OBR) will upgrade its forecasts for UK economic growth to around seven per cent next Wednesday, up from the four per cent it predicted at the last budget in March, according to the EY ITEM Club.

The OBR will downgrade its expectations for the scale of long term damage the pandemic will inflict on the British economy in the long run, providing Rishi Sunak with an extra £25bn annually by the middle of the decade.

Borrowing is anticipated to come in £30bn lower than the OBR’s forecasts, due to the economy bouncing back sharply from the depths of the Covid-19 crisis.

However, the rosier outlook for the Rishi Sunak’s cheque book “is unlikely to prompt a fiscal loosening,” Martin Beck, senior economic advisor to the EY ITEM Club, said. 

“The Chancellor’s September decision to fund extra health and social spending wholly with tax raises suggests deficit reduction is his priority for the time being. And while the economy is much-improved since earlier in the year, the recovery is starting to encounter headwinds.”

The government announced a 1.25 percentage point hike to national insurance in September, which will become a stand alone health and social care levy.

UK businesses are straining under the weight of swelling costs triggered by global supply chains breaking down amid a resurgence in demand as economies emerge from the Covid-19 crisis.

Snapping supply chains are biting British businesses and stalling economic growth, which came in at 0.4 per cent in August.

UK export sales are stalling due to supply chain disruption, according to British Chambers of Commerce.