Preview of the UK Autumn Budget: Fiscal Space and Policy Highlights

(1) ING Bank predicts that higher debt interest costs will reduce the UK's fiscal space from around £24 billion in March to about £10 billion, while Chancellor Healey hopes to raise it to £15 billion or higher. (2) The government is expected to slightly increase spending related to the cost of living, but the total scale of intervention is unlikely to significantly exceed £5 billion and will likely be introduced as temporary measures to avoid inclusion in the primary fiscal rules. (3) The institution expects an increase of about £10 billion per year in capital expenditure, which is not constrained by the fiscal rule requiring a current budget surplus in five years. (4) In order to rebuild fiscal space, tax increases of £5 billion to £6 billion are expected, possibly through raising the bank surcharge and broadening the National Insurance tax base. (5) Overall, the institution does not believe the budget will provide substantial stimulus or significantly intensify the already planned fiscal tightening, and the impact on the Bank of England may be quite limited. (6) The institution has outlined five possible unexpected scenarios, the first being that fiscal space does not fall but instead rises. (7) The market generally expects the Chancellor to face higher debt interest costs and introduce moderate tax increases, but the Office for Budget Responsibility’s assessment of the economy is uncertain and the Treasury sometimes exaggerates pessimism to create positive surprises. (8) If wage growth is slightly revised up, for example by 0.6 percentage points each year for the next two years, it could add about £10 billion to fiscal space, almost completely offsetting the impact of rising interest costs. (9) The drag on fiscal space from lower immigration forecasts may also be less than feared; a slightly higher employment starting point and global equity market gains support capital gains tax forecasts. (10) The second scenario is increased spending, where rising inflation boosts revenue through VAT and income tax, but departmental budgets are not automatically adjusted with prices, leaving room for Treasury action. (11) The institution believes that maintaining the real value of departmental spending plans from March will require about £12 billion, making additional allocations inevitable, but the Treasury may postpone difficult decisions until the spending review in autumn next year. (12) The third scenario is a breakthrough in income tax policy commitments, the fourth is a substantial increase in the minimum wage, and the fifth is a surge in bond issuance. Attention will subsequently focus on the details of the October 28 budget and the Bank of England's November rate decision.