Fiscal Policy

The Spring Budget

Good morning from New Economy Brief. 

Tomorrow the Chancellor will lay out his decisions on tax and spending for the coming year. 

Commentators and think tanks have debated how much fiscal ‘headroom’ he has available against the fiscal rules he set himself in November, whilst pressure is mounting for additional spending across the board to help counter the effect inflation is having on household finances, wages, and departmental budgets.

Can the Chancellor afford not to invest in structural solutions to the cost of living crisis? Read on for our analysis. 

The ‘war chest’ replaces the ‘black hole’. The fiscal mood music around this budget is significantly more positive than it was in November for a number of reasons, with GDP more resilient than feared and positive signs that inflation is receding. This adds up to a £30bn ‘improvement’ in the public finances compared to November according to the ONS. Whereas the last fiscal event was preceded by frantic briefing about the size of the ‘fiscal black hole’, this one has been dominated by a very different kind of fiscal context. 

Important economic decisions should not be based on such uncertain forecasts. As right-wing economist Julian Jessop argued: “it’s bonkers that the Treasury places such weight on projections that are known to be unreliable. This leaves very little room for Chancellors to make their own judgements.”

Spending pressures. Pressure is growing from Conservative voices to use the Treasury’s extra headroom to cut taxes, particularly to prevent the planned rise in corporation tax from 19% to 25% in April. The Institute for Fiscal Studies (IFS) notes that the long term economic outlook is “too ‘murky’ to wave through a bunch of tax cuts.” (Reminder: there is a lack of evidence that tax cuts generate economic growth.) However, many economists are arguing that there is a strong case for increasing government spending now in a variety of ways that could boost GDP growth and make the public finances even more resilient to future shocks. 

Choices and gambles. The government story around this budget is very much ‘steady as she goes’ with the improved public finances a vindication of prudence and a mark of restored ‘stability’. The assumption of many in Westminster is that the Chancellor will attempt to ‘bank’ his additional headroom and use it to store up a “war chest” for pre-election tax cuts. This would enable a narrative going into the election that ‘the plan had worked’. Taking this approach is a choice, and it is also a big political and economic gamble. The idea that the economy has returned to ‘stability’ might be true from the perspective of the bond markets, but seems tone deaf when millions of people are finding their personal finances more unstable than ever. When people’s incomes are so insecure, can the government really afford (politically, and economically) to avoid using the fiscal space to solve the cost of living crisis?

  • Stagnation nation. There is a fine line between being stable and being rudderless. There is a real risk that an empty Budget red box this week will lead the public, and investors, to conclude that Britain is closer to the latter than the former. With the USA and EU embarking on new economic strategies based on encouraging public and private investment in the green transition, and the Labour Party echoing this rhetoric, the lack of a similar vision or strategy from the UK government is all the more striking. 
  • No alternative? The government’s pre-budget briefing has been that they are unable to act because any additional spending would break fiscal rules or risk fuelling greater inflation. The Stop the Squeeze campaign have released a pre-budget briefing addressing these arguments head on, and conclude that they do not stand up to scrutiny.
  • Broken Britain. More profoundly, there is a deep sense across the country that things are going in the wrong direction. Public services are at breaking point, strikes are continuing, energy bills are still sky high, and growth is nowhere to be seen. The public, unsurprisingly, continue to put the cost of living crisis at the top of their list of concerns. From an economic point of view, deciding not to act now risks prolonging economic stagnation, deepening the crisis in public services, and leaving the UK lagging behind on green investment. From a political point of view, it risks deepening the impression that the government lacks a plan to deal with the cost of living crisis or the economy - an impression that no amount of pre-election tax cuts will be able to shake.
Weekly Updates


SVB/Big Bang 2.0? Finance Innovation Lab’s Jesse Griffith’s argues that the fate of Silicon Valley Bank is a warning sign about the government’s financial deregulation agenda.


Cost of renting crisis. New analysis from NEF finds that three in five renters are unable to afford a decent standard of living, with those on the lowest incomes spending 40% of their income on rent.


ECHR vs strikes bill. The Equality and Human Rights Commission has criticised the government’s anti-strike legislation, saying it could lead to workers losing unfair dismissal protections.

Public services

Fair pay for critical days. The Fairness Foundation have released a new report about public opinion towards the early years sector, finding that 8 in 10 people think that wages are too low in the sector.

Local economies

Cost of Living Map. Campaigned 38 Degrees have launched a new map which uses public opinion data to display attitudes to the crisis in different regions and constituencies.