Jeremy Hunt will announce his budget on Wednesday with the government under pressure to provide more support on soaring living costs, and as the global economy grapples with the collapse of Silicon Valley Bank.
The chancellor is widely expected to announce an extension of financial support for energy bills and policies to encourage more people into work, alongside updated forecasts for the economy and public finances. Here are five key charts that will underpin his statement.
The UK’s annual inflation rate has eased for three consecutive months, although at 10.1% it is still at one of the highest levels in 40 years. It comes as global energy prices have fallen back in recent months, helping to bring down petrol and diesel prices.
After wholesale oil and gas prices surged after the Russian invasion of Ukraine a year ago, economists now expect them to help bring down headline inflation – possibly to below the Bank of England’s 2% target by the end of 2023.
Rishi Sunak’s government has promised halving inflation this year is one of his five key priorities. However, the Office for Budget Responsibility had already expected this to happen and will publish updated forecasts at the budget.
The drop in energy prices is expected to reduce the cost of the government’s support package for households and businesses. Alongside a stronger than expected economic performance, bolstering tax receipts, this should give the chancellor more headroom against his self-imposed borrowing and debt targets.
The budget deficit – the gap between public spending and income – for 2022-23 is expected to come in about £30bn lower than the OBR forecast in November.
The national debt – the sum total of every annual budget deficit – is also likely to be lower as a percentage of GDP, although much will depend on the OBR’s economic growth forecasts. The Resolution Foundation expects Hunt will have about £15bn of headroom against his targets for 2027-28, while the National Institute of Economic and Social Research estimates it could be as large as £97.5bn.
These gains could help Hunt to increase spending or offer tax cuts. However, after Liz Truss’ disastrous mini-budget, and with SVB’s collapse, he will probably argue that caution is warranted – and save some giveaways for closer to the election.
In November, the OBR forecast GDP would fall by 1.4% in 2023, as consumers cut back on spending amid sky-high inflation. The economy has performed better than expected since then, and with inflation expected to fall rapidly this year a short-term growth upgrade is likely.
Over the longer term, however, growth is likely to remain weak, as the economy grapples with worker shortages, lacklustre productivity growth, subdued business investment, higher borrowing costs, and Brexit trade barriers.
Official figures show the economy is no bigger now than on the eve of the Covid pandemic, while the Bank of England forecasts that it will not return to that level until 2026. A big judgment will be whether the OBR shares this pessimism.
Hunt is under pressure to support business with energy costs and the offer of tax breaks, with the aim of reversing a dismal track record for company investment in Britain over recent years.
Business investment in the UK has underperformed comparable G7 economies for decades. However, after the political and economic uncertainty of the Brexit vote in 2016, then the Covid pandemic, growth has flatlined.
With the government increasing the headline rate of corporation tax from 19% to 25% from April, business leaders have called for a package of investment reliefs to offset the rise.
Economic inactivity – when 16- to 64-year-olds are neither working nor job-hunting – has risen sharply since the Covid pandemic, fuelled by record levels of long-term sickness. About500,000 more people are inactive than in February 2020.
With employers struggling to cope with chronic worker shortages across the economy, the chancellor is expected to pitch his commons speech as a “back to work” budget to encourage increased employment.
Hunt will announce support with childcare costs, as well as changes to tax allowances for pensions, to encourage more parents and older people to work. However, he is likely to face calls to go further, amid criticism that austerity and underfunding of health and social care has contributed to record sickness rates among working-age adults.