Martin Wheatcroft

My chart for ICAEW this week illustrates how despite being a “tax-raising Budget”, the cumulative net effect of all the changes announced last week is to add £61bn to the public sector net debt forecast for 31 March 2030.

While my chart for ICAEW last week looked at the impact of Budget 2025 on 2029/30, the fourth year of the fiscal forecast used for the Chancellor’s fiscal rules, this week’s focus is on the cumulative effect of the changes made between now and 31 March 2030.

The first four bars of our step chart analyse the OBR’s forecast revisions, starting with extra borrowing to fund the expected budget overrun in the current financial year (2025/26) of £18bn (technically a £21bn higher deficit less a £3bn opening adjustment). This is followed by more borrowing to fund higher local authority spending of £26bn over four years (an average of £6.5bn a year) and to cover cumulative lower receipts of £35bn from downgrading the productivity growth assumption (£2bn a year rising to £16bn by 2029/30). This is then offset by £28bn over four years from the impact of inflation and wage growth on receipts exceeding the impact of inflation and other cost pressures on public spending.

Borrowing over the next four years is then increased by £19bn (just under £5bn a year on average) to cover the government’s welfare reversals over the summer – the restoration of the winter fuel allowance to many pensioners and the decision not to proceed with eligibility restrictions for disability benefits that were needed to make the Spring Statement add up.

The decision to lift the two-child benefit cap adds another £10bn (£2.5bn a year on average) to projected debt over the next four years, while other policy measures and working capital movements are expected to add £17bn (£11bn and £6bn respectively) on top of that.

A £36bn net reduction in debt from higher tax receipts net of indirect effects over the next four years (zero in 2026/27, £4bn in 2027/28, £10bn in 2028/29, and £22bn in 2029/30) reduces the cumulative impact to £61bn, with the £3,391bn forecast for 31 March 2030 at the time of the Spring Statement back in March 2025 being revised up to £3,452bn in the Autumn Budget 2025.

Perhaps the most surprising aspect of this analysis is the £26bn revision to the forecast for local government spending. While not as large as the well-publicised impact of productivity downgrades on the OBR’s fiscal forecast, it highlights some fundamental bookkeeping issues in how the government manages the public finances. A monthly financial consolidation process that excludes local government, schools and many other public bodies means the Office for National Statistics (ONS) and HM Treasury rely on forecasts and estimates instead of actual data when reporting the monthly public sector finances, exacerbated by the use of the four different accounting frameworks across the public sector and the local audit crisis in England that has created a large backlog in local authority audited financial statements.

The OBR states: “Recent substantial revisions to LA borrowing estimates and outturns, which reflect ongoing challenges in obtaining timely and high-quality estimates particularly for expenditure by local authorities. The ONS, the Ministry of Housing, Communities and Local Government, the Treasury and the OBR have formed a joint Local Government Financial Information Taskforce to investigate and address these concerns, with the overall objective of improving the flow of data to the ONS and the accuracy of our forecast.”

Meanwhile, the backloading of tax rises means that although the forecast is for a current budget surplus in 2029/30 and for a reduced overall deficit in that year, the summer welfare reversals, lifting of the two-child benefit cap, and other policy changes all require more borrowing before the tax rises kick in. 

The 2025 Budget provides very mixed messages about the UK public finances’ prospects. There is more borrowing over the next three years before tax rises fully kick-in, while at the same time there are significant risks that mean the government could be back here again next year or the year after to ask for more money.

If ever a Chancellor could really do with some good economic news, it is probably in the coming year.

This chart was originally published by ICAEW.

My chart this week for ICAEW looks at how the Chancellor used tax rises to refill and increase her budget headroom after forecast revisions and spending increases eliminated the projected current budget surplus for 2029/30.

The chart shows how the projected current budget surplus of £10bn in 2029/30 was reduced by £6bn of Office for Budget Responsibility (OBR) forecast revisions, by £5bn of spending increases announced in the Autumn Budget, and by £1bn from the freezing of fuel duties for yet another year.

Together these reduced the Chancellor’s headroom against her primary fiscal rule (to be in a current budget surplus by the fourth year of the fiscal forecast) from £10bn to minus £2bn – in effect breaching her fiscal rule before taking account of tax rises.

The Chancellor has then restored – and increased – her fiscal headroom to £22bn through a long list of tax rises that are anticipated to generate £24bn more in receipts in 2029/30.

Forecast revisions

The rumoured forecast downgrade from the OBR of £6bn in 2029/30 turned out to be much less significant than expected. 

The OBR cut its receipts forecast for 2029/30 by £16bn a year because of weaker assumed productivity growth. But this was more than offset by a £30bn increase from higher nominal wages and prices, driven by both inflation and real wage growth, to add £14bn to receipts in that year – an increase not a decrease to the receipts side of the forecast.

This was offset by £20bn in higher current spending, of which £6bn was from higher uprating of welfare benefits and growth in claimants and caseloads, £6bn from government policy reversals on the winter fuel allowance and disability benefits, £4bn in higher debt interest, £2bn in higher local government spending, and £2bn in other changes.

The resulting deterioration of £6bn in the projected current budget surplus for 2029/30 was £14bn smaller than the £22bn deterioration anticipated by the Institute for Fiscal Studies (IFS) in its pre-Budget forecast (as used in our chart of the week on the Autumn Budget hole). The principal driver was £22bn in incremental receipts from higher inflation and higher real wage growth less £6bn in higher spending for similar reasons.

Because departmental budgets for 2026/27, 2027/28 and 2028/29 set out in the Spending Review earlier this year have not been increased for this higher level of inflation, the risk is that future Budgets will need to top up the amounts allocated to departments to deal with cost pressures that are likely to arise.

Spending increases

Current spending is projected to increase by £5bn in 2029/30, comprising £3bn to cover the annual cost of abolishing the two-child benefit cap, £1bn in higher debt interest, and £1bn in net other changes in non-interest current spending.

The OBR also announced that it had reduced its underspend assumption for departmental budgets during the latest spending review period (2026/27 to 2028/29 for current spending) by an average of £4bn a year to reflect the increased pressures on budgets from higher inflation. There was no similar adjustment to 2029/30 current spending as it is not covered by the spending review, but there is a risk that a similar adjustment may be needed by the time of the 2027 spending review. 

Fuel duty freeze

Freezing fuel duties has become a consistent feature of Budgets since 2011, with the effect of reducing annual tax receipts in real terms by just under £1bn a year.

Given the current Chancellor has chosen to continue this practice in two successive Budgets, it is disappointing that fiscal forecasts have not reflected the anticipated £3bn additional reduction in tax receipts in 2029/30 if fuel duty is frozen again in the next three Budgets.

Tax rises

The Chancellor announced a total of £27bn in tax rises in the Budget (£26bn if the fuel duty freeze effective tax cut is netted off), but this is expected to generate £24bn in incremental tax receipts once behavioural responses and other indirect economic effects are adjusted for.

These tax rises are expected to generate the following amounts per year by 2029/30:

• £8bn from extending the freezing of personal allowances (more ‘fiscal drag’).
• £5bn from restricting the use of salary-sacrifice schemes to make pension contributions.
• £2bn from increased income tax rates on property, savings and dividends.
• £1.5bn from changes to writing-down allowances.
• Just under £1.5bn from a mileage-based charge on electric cars.
• Just over £1bn from gambling duty reform.
• Just under £1bn from capital gains tax on employee ownership trusts.
• Just under £0.5bn from a high value council tax surcharge.
• Around £4.5bn from other tax measures.
• £2bn from improved tax compliance and collection.

Higher headroom  

The Chancellor chose to increase headroom against her principal (current budget) fiscal rule from £10bn last year to £22bn and to increase headroom in her secondary (debt) fiscal rule from £15bn to £24bn. 

These are both positive in that they provide a much bigger cushion against potential forecast downgrades in the spring or autumn next year, reducing the risk of another round of significant tax rises in the Chancellor’s third Budget in 2026. It also helps that she is likely to gain around £15bn of extra headroom as the main fiscal rule moves to being tested in the third year of the forecast, which comes with a margin of permitted current budget deficit up to a maximum of GDP.

However, significant downside risks remain, so this outcome is far from assured. The Chancellor still faces the challenge of reviving a weak economy and delivering substantial efficiency savings if she is to keep public spending under control in the absence of more fundamental reform. That task is made harder by the risk of bailouts for local authorities and universities, and by continued pressure on the welfare budget.

This chart was originally published by ICAEW.