Good morning from New Economy Brief.

With the Budget on 6th March fast approaching, this week’s New Economy Brief looks at the economic and political backdrop, unpacks the idea of ‘fiscal headroom’, and explains how the narrative that the economy has ‘turned the corner’ is built on plans for huge public sector cuts.

Here we go again. 

It’s Budget season again and if it feels like we were here quite recently, that’s because we were. When Chancellor Jeremy Hunt poses with his red box on 6th March, it will have been just 15 short weeks since he delivered his Autumn Statement in November. These short gaps are one of the reasons many people argue that the UK should return to a single major fiscal event per year, something that Shadow Chancellor Rachel Reeves has promised as part of her Fiscal Lock. The reason previous Chancellors have not adopted such a policy is that two fiscal events a year means two opportunities to dominate the news cycle for a few weeks and force everyone to write about the government’s economic agenda. And as we are no exception, let’s dive straight in.

Time is running out. The central fact about this Budget is its political context. It is widely seen as the government’s last chance to do anything that voters might actually notice ahead of a general election, which is still expected around November. There may turn out to be another fiscal event later in the year on the eve of the election (yes, that would be three in about 9 months) but it would be too close to polling day to have any real effect. 

Déjà vu. This need for short-term political solutions is one of the reasons that the Chancellor is rumoured to be turning once more to the button marked ‘tax cuts’. However, the other salient piece of political context is that the government already made some reasonably chunky tax cuts in November, and they don’t seem to have narrowed the gap in the polls at all. This is at least partly because those cuts came in the context of overall tax rises through the process known as fiscal drag (where tax thresholds are frozen in cash terms, so people gradually pay more), which meant many people won’t be paying less tax at all. Though it could also be because the public would prefer more spending on public services.

Once more for luck. Despite this lack of obvious political impact, speculation is rife that the Chancellor will return with more cuts to National Insurance Contributions or to income tax in the Budget (along with the annual ritual freezing of fuel duty). One thing he is less likely to do is permanently unfreeze the tax thresholds and end the fiscal drag, partly because it is less dramatic than cutting the headline rate, and partly because it would be much more expensive, possibly even expensive enough to breach his fiscal headroom. Which brings us to…

Restricted headroom. 

The issue of available ‘fiscal headroom’ has been unusually prominent in the lead up to the last few fiscal events. Given that it is often misunderstood, it is worth unpacking. Fiscal headroom is simply the amount the Chancellor can spend without breaching his fiscal rules, and in particular the rule which is most at risk of being breached, which is that the debt/GDP ratio should be falling at the end of a rolling five-year period. In the run up to a Budget, the Office for Budgetary Responsibility (OBR) provides regular updates about the size of this headroom in order to inform the Chancellor’s policy-making process. These numbers (or a heavily spun version of them) inevitably find their way into the press, leading to a kind of running commentary on the available headroom and what this means for the Budget’s contents. This is often presented as the OBR ‘handing the Chancellor a war chest’ or ‘slashing the Chancellor’s room for manoeuvre’. 

There are few obvious issues with this. One is that the amount of headroom bears no real relation to how much money the Chancellor could spend at the Budget. The fiscal rule is quite arbitrary; the Chancellor could change it (and often has). Another problem is that the OBR projections for the debt/GDP ratio in five years time are highly uncertain, and small changes in the path of inflation or GDP growth could mean that the numbers are out by tens of billions of pounds either way. As Sam Freedman notes, it is “genuinely crazy” that a highly uncertain projection of whether the debt/GDP ratio falls slightly between 2028 to 2029 is the key determinant of government policy in February 2024.

Go forth and multiply. Another key issue with breathless headroom commentary is that of course, the decisions taken in the Budget should themselves affect the debt/GDP ratio, and therefore the headroom available. ‘Should’ is an important word here. The OBR has faced criticism over whether it is too pessimistic about the impact of policies on GDP growth. Broadly speaking, many on the right (including former Prime Minister Liz Truss) believe that the OBR underestimates the growth that tax cuts will generate, while others make the case that its negativity about the benefits of investment has pressured governments to cut public investment in recent years. NEF's Lydia Prieg proposes changes that the OBR should make to its forecasting methodology to enable more green investment: extend the time horizon of forecasts to properly account for the benefits of investing in climate policies, education and skills, and explore what sorts of investments would have stronger positive economic impacts per pound spent as IMF evidence has shown green investments to have higher multiplier effects than carbon intensive equivalents.

So, what is the headroom? However, the government seems determined to stick with the idea, so it is worth exploring what is driving the changes in fiscal headroom ahead of the Budget. In broad terms analysts expect fiscal headroom to rise this time around for three main reasons. The first is that inflation is now expected to fall slightly faster than it was in November. This in turn lowers interest payments on index-linked government debt, creating a little more room. Second, perhaps counterintuitively given the UK has just entered a recession, the general expectation is for a slightly more optimistic growth forecast, which again creates a tiny bit of room. Finally, the rolling debt target will have been pushed back a few months longer, which in turn helps the target to be met.

Don’t mention the cuts. But to focus on any of these causes as the reason there is additional headroom would be to miss the much bigger point, which is that the headroom only exists at all because of the real-terms spending cuts the government has pencilled in for the post-election years. These cuts, affecting both day-to-day spending and investment, are widely thought to be completely unrealistic, which is why the whole exercise has been dubbed a ‘fiscal fiction’. They are on the scale of the cuts seen after 2010, but this time with a public sector which is already struggling to maintain basic services. The Chancellor’s refusal to spell out where the axe will fall has meant there has been far less scrutiny of these plans than there should have been, allowing the spread of the narrative that tax cuts are ‘affordable’ because the economy has ‘turned the corner’. But this view is completely at odds with reality. High interest rates, low growth, and low investment mean the government is either going to have to raise taxes, cut spending, or accept higher debt. Talk of headroom and tax cuts cannot disguise this reality for much longer.

State of the debate. A recent FT story suggested that the Chancellor may be planning to increase the scale of the spending cuts planned for after 2025 to make more room for tax cuts in this Budget. The idea here would be to put Labour in an even more difficult position; back the tax cuts and (in the absence of other significant revenue raisers) you effectively endorse the spending cuts, but oppose the cuts and you give the government the dividing line on tax which they want so badly. Previously it had been expected that Labour would choose to back the tax cuts as long as they were targeted at ‘working people’, but recent comments from Shadow Chancellor Rachel Reeves suggest that might not be the case. Reeves argued that public services need an “immediate injection” of cash and said “I will never make any commitments either around spending increases or tax cuts without being able to say where the money is going to come from”. Could this signal a new willingness from Labour to contest the tax cuts and argue instead for public service spending? If so, the polling suggests it could be a popular move.

Weekly Updates


Publicly owned energy and net-zero. A new report by Common Wealth argues that the current approach to decarbonising the power system, based on “market coordination, premised on private investment, market-based governance and private profitability” will be “slower, more unequal, costlier” than public coordination of the transition. The report explores what a new public green energy generating company could look like and how it would save money, lower energy bills and accelerate the shift towards energy independence. 

Fuel poverty. 3.17 million households are in fuel poverty, according to analysis by the New Economics Foundation’s Chaitanya Kumar of the government’s latest fuel poverty statistics. The data shows that one in three households in England paid more than 10% of their income after housing costs on energy – the highest since 2010.


Rishi’s tax rate. Analysis by Tax Justice UK has found that the Prime Minister is paying the same rate of tax as the average teacher. Because most of Rishi Sunak’s earnings come from financial investments rather than work, and with capital gains tax capped at 20%, he only paid an effective tax rate of 23% – the same rate paid by someone earning £41,000 from employment. 


Child benefit. A new briefing by the Women’s Budget Group discusses the shortfalls of the current Child Benefit system, and argues in favour of returning to a “stronger universal system designed to meet the needs of parents and children alike”. It argues that the High Income Child Benefit Charge (HICBC) “undermines the effectiveness of a universal child benefit” and equates to cutting funding to families estimated by around £4 billion a year.


Heart disease and prosperity. A new report by the Institute for Public Policy Research (IPPR) argues that stalling progress on cardiovascular disease undermines “individual and national prosperity” as it is one of the most common reasons why people are too ill to work. The report outlines how to improve prevention, condition management and research on the issue.