Tax and spending questions facing the government in autumn 2021

Think tank: Institute for Government

Author(s): Thomas Pope; Gemma Tetlow; Graham Atkins

August 30, 2021

This report from UK think tank the Institute for Government assesses the public finance forecasts and what these might mean for the multi-year spending review.

Numerous spending pressures on government mean Rishi Sunak will face a difficult balancing act this autumn. Remaining committed to the letter of “the perverse” state pensions triple-lock will increase pressure for tax rises or spending cuts elsewhere. This report assesses the public finance forecasts and what these might mean for the chancellor’s room for manoeuvre ahead of this autumn’s multi-year spending review – the first in three years. The good news for Sunak is that the economy has recovered quicker than the Office for Budget Responsibility (OBR) expected back in March. An upgrade of the OBR outlook – so it matches the Bank of England’s – would reduce borrowing forecasts in 2025/26 by around £25 billion and give the chancellor an additional £12bn to spend above his March 2021 plans, even if he wanted to build in some headroom against his ambition not to borrow for day-to-day spending. Ordinarily, an extra £12bn would give a chancellor an easy autumn. However, with the March forecast based on several tight spending assumptions, the report warns that £12bn will not be enough to avoid difficult decisions. Further spending will need to be found to deal with all the demands facing the government. These include coronavirus-related costs beyond this year (such as continued test and trace, and vaccination programmes), backlogs created by the pandemic, the prime minister’s ambition to “fix” social care, pressure to maintain the ‘temporary’ uplift in Universal Credit payments, and extra spending required to stick to the letter of the state pensions triple lock. The report calculates that: The state pension triple lock will cost £4bn per year more than expected in March due to a rise in average earnings growth Cancelling the cut to the ‘temporary’ Universal Credit’ uplift would cost £6bn a year Introducing a cap on social care and meeting social care pressures could cost £10bn per year.