Rishi Sunak, chancellor of the exchequer, will on Wednesday claim that he has successfully steered the economy through the Covid-19 crisis, in a Budget combining a new commitment to fiscal discipline with extra spending on key public services and measures to tackle the cost-of-living crisis.
Sunak will brandish new official forecasts showing that the UK economy has grown faster than expected this year and that long-term Covid-19 “scarring” of the economy will be less severe than feared, giving him vital fiscal room for manoeuvre.
The upgraded forecasts will allow the chancellor, in his third Budget, to trumpet investment in priorities including the NHS, local transport and support for “left behind” areas, while also helping families facing a winter of rising bills and energy costs, according to government insiders.
But the improved forecasts from the UK fiscal watchdog will also allow him to put aside a “rainy day fund” of billions of pounds in the event that higher interest rates or a spike in Covid cases blow his fiscal plans off course.
Sunak hopes that this insurance fund will not be called upon and will ultimately turn into a pre-election war chest. Both the chancellor and Boris Johnson, prime minister, want to be able to announce tax cuts before the next election.
Any such cuts would only partly offset some of the large increases in corporation tax and national insurance he has imposed this year, along with the extra burden caused by the freezing of income tax thresholds.
To underpin a return to a semblance of budgetary discipline, Sunak will unveil new fiscal rules committing him to balancing the books for day-to-day spending by the end of the parliament in 2024-25, in line with a Conservative election manifesto pledge.
“Today’s Budget begins the work of preparing for a new economy post-Covid,” Sunak will say. “An economy of strong public services, vibrant communities and safer streets.”
As well as his Budget, Sunak will also set out a three-year spending settlement for government departments. He will prioritise Johnson’s “green industrial revolution”.
The chancellor will claim the country is entering “a new age of optimism”, but there are storm clouds over the economy and, for many households, the winter months hold the prospect of rising inflation and belt-tightening.
Sunak’s ability to spend more while also putting aside money to guard against future economic shocks is primarily down to the Office for Budget Responsibility upgrading its forecasts for economic growth compared with its analysis at the March Budget.
The chancellor will claim that the improved outlook is testament to his own economic stewardship during the pandemic and, in particular, to policies which averted a widely predicted unemployment catastrophe.
But the threat of rising inflation and interest rates haunt Sunak. He has warned that a one percentage point rise in inflation and interest rates would cost the Treasury about £25bn a year, blowing his plans off course.
The improved forecasts have, for now at least, allowed Sunak to find money to meet Tory priorities including the NHS, skills, transport and Johnson’s “levelling up” agenda to tackle regional inequalities.
Arguments between the fiscally conservative chancellor and the higher-spending prime minister have been less severe than expected.
Tory MPs expect Sunak’s Budget “surprise” could be a package to help poorer households through the winter.
The OBR is expected to say the current burst of inflation will be temporary and, by the end of the parliament in 2024-25, Sunak will be able to say he is meeting his new fiscal rules with room to spare.
Forecast tax revenues will exceed day-to-day public spending, balancing the current budget, while the burden of public sector debt will begin to fall again.
Even with higher interest rates, the cost of servicing that debt will form much less than 6 per cent of tax revenues.
Rachel Reeves, shadow chancellor, said the Budget must create a more resilient economy, adding that Labour would not raise taxes on working people and British businesses.
“Labour would grow our economy . . . With costs growing and inflation rising, Labour would ease the burden on households, cutting VAT on domestic energy bills immediately for six months,” she added.