3 minute read 21 Oct 2021
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Why significant fiscal loosening is unlikely in the Autumn Budget

Authors
Hywel Ball

EY UK Chair and UK&I Managing Partner, Ernst & Young LLP

UK Chair and UK&I Managing Partner. Leading our 17,000 people in the UK. FTSE 100 audit partner. Father of three and Welsh rugby fan.

Peter Arnold

EY UK Chief Economist

Economics leader with over 20 years of experience. Advises public and private sector clients on macroeconomics, policies, regulation and competition. Improves client strategies via analytics.

Martin Beck

Chief Economic Advisor to EY ITEM Club

Economic Advisor. Analysing and monitoring the UK economy to help businesses understand economic issues and the environments they operate in. Contributing to the national economic debate.

3 minute read 21 Oct 2021
Related topics Growth COVID-19 Tax Workforce
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As the UK economy outperforms OBR predictions, EY ITEM Club expects the Chancellor’s Autumn Budget to address rising inflation and cost of living.

In brief
  • Chancellor must try to return the public finances to a degree of post-pandemic ‘normality’, reduce the deficit, and tackle rising cost of living pressures.
  • Other policy priorities include furthering the Government’s net zero ambitions and increasing investment to support levelling-up objectives.
  • EY ITEM Club expects the Government may bring back the three fiscal rules presented in the March 2020 Budget, which were suspended during the pandemic.

If someone had told the Chancellor back in March 2021 when he made his last major fiscal statement, that the economy would have almost fully recovered the losses made since February 2020, and that borrowing YTD in FY 2021–22 would be £30b below the OBR forecast, we suspect he would have been very happy. And indeed, that’s where we are. The UK economy has significantly outperformed the OBR expectations, with faster growth leading to higher tax receipts, and hence much lower borrowing, which in turn leaves the country (and therefore the Chancellor) in a much better fiscal position than at any time since the COVID-19 pandemic began.

Download EY ITEM Club's full Budget predictions

We may also expect the fiscal position to get even better. The withdrawal of COVID-19 support should start to reduce outgoings, plus the raft of tax increases already announced – most notably affecting National Insurance, corporation tax, and personal allowances – mean the deficit is expected to fall from 15.5% in FY2020–21 down to around 1% by FY2024–25. This potentially leaves room for some pre-election loosening, as some commentators have already flagged.

Chancellor under pressure to tackle the cost of living

The economic optimism of the summer is being increasingly tempered by concerns around rising inflation. The knock-on impact of a global and synchronised recovery in demand, tight labour markets, and COVID-19-constrained and disrupted supply chains, has led to shortages and significant pricing pressure across a number of sectors – most obviously in construction, hospitality and energy. These trends – albeit to an extent magnified by the media – risk the creation of a cost of living crisis as we head into winter, particularly for essentials such as food and drink, and energy. In the face of this, the Chancellor will come under increasing pressure to act, particularly on energy costs, and to provide additional support for both consumers and businesses.

OBR likely to raise GDP growth this year to approx.

7%

The previous forecast predicted 4% growth

An opportunity to advance net-zero ambitions and policy objectives around levelling up

Furthermore, as COVID-19 support is being withdrawn, demand for spending in areas most adversely impacted by the pandemic – the NHS, education, and public transport – will increase, and will benefit from strong political support from the electorate. The Government is also committed to increasing public investment in infrastructure to support their policy objectives around levelling up. Finally, the Chancellor will need to wrestle with some of the fiscal contradictions of environmental ambitions around net zero. For example, the acceleration in the purchase and use of electric vehicles will start to erode revenues from fuel duty and Vehicle Excise Duty, whilst the current energy crisis lays bare the need for greater resilience – and perhaps variety – in our energy mix.

All of this leaves the Chancellor with plenty of challenges as he looks to craft his third budget, and a fine balance to tread between deficit reduction, spending demands, and taxation.

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Summary

Whilst the economy climbs back to its pre-pandemic position, a Budget of major tax and spending measures is not expected. Concerns about a ‘cost of living crisis’, triggered by higher inflation and surging energy prices means the Chancellor will have to balance his instincts to get government borrowing down, with political pressure to respond to cost of living concerns. Temporary tax cuts or subsidies to reduce energy bills seem likely, but with the next general election several years away and borrowing still high, it is thought the Chancellor will want to emphasise a return to old-fashioned fiscal ‘prudence’.

About this article

Authors
Hywel Ball

EY UK Chair and UK&I Managing Partner, Ernst & Young LLP

UK Chair and UK&I Managing Partner. Leading our 17,000 people in the UK. FTSE 100 audit partner. Father of three and Welsh rugby fan.

Peter Arnold

EY UK Chief Economist

Economics leader with over 20 years of experience. Advises public and private sector clients on macroeconomics, policies, regulation and competition. Improves client strategies via analytics.

Martin Beck

Chief Economic Advisor to EY ITEM Club

Economic Advisor. Analysing and monitoring the UK economy to help businesses understand economic issues and the environments they operate in. Contributing to the national economic debate.

Related topics Growth COVID-19 Tax Workforce
Upvote