The Social Market Foundation's Chief Economist, Nida Broughton, assesses the state of the public finances and options for the Chancellor in this pre-Budget briefing 'Spending Choices after 2015'.
- The public finances are on track, and there may be some room for pre-election giveaways. These could amount to £3 billion – £5 billion, but potentially more, if the austerity set out in the Autumn Statement is relaxed.
- Tax cuts are looking likely. These could include increasing take-home pay by reducing income tax or national insurance contributions.
- But the margin for error on the OBR’s economic forecasts are substantial, as they are highly sensitive to economic growth forecasts. It will be very uncertain as to whether any improvement in the public finances is temporary or permanent.
- And given the spending cuts to come in the next Parliament, it would be better to put any savings towards reducing these rather than reducing taxes.
If there is some extra room in this year’s Budget and the aim is to reduce the deficit, then the prudent option would be to put any savings towards reducing future spending cuts. The economic forecasts are so uncertain that it will be very difficult to know whether any improvement is temporary or not. If there is a political desire to increase spending, it would be best to increase growth-friendly spending that will improve living standards and boost the long-term health of economy and finances, as set out in Investing for Growth. Cuts in income tax now would suggest that the aim is a smaller state, not deficit reduction.