The Chancellor is set to update her fiscal plans next Wednesday (26 March) against the background of a faltering economy.
According to a report from Resolution Foundation, Reeves will need to find around £4.4bn to meet her target of ensuring day-to-day spending is paid for with tax rather than borrowing, thanks to a combination of weak growth and higher interest rates.
The Government is reportedly focusing on cutting incapacity and disability benefits to stem rising spending and support more people into work.
In particular, there are rumours that it is focused on cutting Personal Independence Payments (PIPs) – but experts warn that this is a benefit that isn’t related to work. Instead, PIP is money for people who have extra care needs or mobility needs as a result of a disability.
Resolution Foundation has warned that cutting PIP by £5bn in 2029/30 – for example, by raising the threshold to qualify for support – about 620,000 people could lose £675 per month on average.
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The think tank calculated that 70% of these cuts would be concentrated on families in the poorest half of the income distribution. It warned that any changes to PIP and incapacity benefits must be handled very carefully.
Calls for higher taxes
The Resolution Foundation said the Government should raise taxes to meet the ‘fiscal rules’ it has set.
Fewer than five months on from the Chancellor’s Autumn Budget, the UK’s economic outlook has deteriorated markedly. GDP is now expected to be around 1.2% lower, CPI inflation is 0.4 percentage points higher, and interest rate expectations are 0.4 percentage points higher than the Office for Budget Responsibility (OBR) expected at the time of the Autumn Budget.
Most worryingly, the foundation’s employment estimate (using ONS population and HMRC payroll data) suggests the number in work is falling at a pace consistent with a recession.
The foundation estimates that this deterioration would lead the OBR to revise down its projection for the current balance from a surplus of £9.9bn in 2029/30 to a deficit of around £4.4bn. This means that, without fresh policy action, the Chancellor would be breaking her newly legislated fiscal rules.
Extending the freeze in personal tax thresholds by a further two years to 2029-30 would raise around £8bn. Crucially, this would not affect living standards in the short term, as the policy wouldn’t take effect until April 2028, while 80% of extra revenue would come from households in the richest half of the income distribution.
James Smith, research director at the Resolution Foundation, said: “The UK’s economic outlook has declined markedly since the Budget last autumn. Weaker growth and higher interest rate expectations look set to turn the UK’s projected current surplus of £10bn into a deficit of around £5bn.
“The Chancellor must act decisively to meet her fiscal rules. But with the jobs market in recession territory, lower-income households shouldn’t bear the brunt of any consolidation.
“Crucially, she should avoid turning the Spring Statement into a ‘sticking plaster’ Budget, with long-term thinking on welfare reform undermined by the quest for short-term savings that could cause real harm.
“And with Britain’s fiscal pressures more likely to intensify rather than fade away, continuing to rule out tax rises is going to make future Budgets even more challenging to deliver.”
