Following the various climbdowns the government has had to make in order to get its welfare reform bill through parliament, it is likely there will be no room for any relief on taxes in the Autumn budget.
Cuts to the personal independence payment (Pip) announced at Rachel Reeves’s spring statement in March were meant to save the Treasury £5bn a year.
Ministers’ changes to the bill last week to try to avoid a Commons defeat – reversing some cuts to universal credit and applying the stricter Pip eligibility rules only to new claimants – had already reduced that saving to about £2bn.
After stripping the Pip changes out of the bill completely on Tuesday, the Resolution Foundation estimates there will be no savings in five years’ time – leaving a £5bn hole in the chancellor’s plans.
Reeves also faces a £1.25bn cost from her decision to restore the winter fuel allowance to most pensioners – having stripped it away last year.
Between them, these U-turns will swallow most of the £10bn headroom the chancellor created for herself against her fiscal rules at her spring statement.
Paul Johnson, the outgoing director of the Institute for Fiscal Studies (IFS), has warned that taxes in Britain are set to remain high for decades. He said: “The tax burden is going up at its highest level ever in this country,” and suggested that the Chancellor may need to increase taxes to meet fiscal rules.
Is Reeves on course to break her fiscal rules?
We won’t know until the Office for Budget Responsibility (OBR) publishes its latest forecasts in the autumn, but it certainly looks more likely after the latest reversal.
There is a widely held view among City experts and thinktanks that the OBR could decide to revise down its growth forecasts – which could have a significantly bigger impact on the public finances than the welfare U-turns.
So, our advice as ever remains the same. We are advising caution in making plans and keeping a close eye on cash flow and balances.
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